Introduction
In this introduction to cost of capital, you'll learn why calculating an appropriate discount rate matters for investment decisions and how different sources of finance carry different levels of risk.
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In this lesson
- 0:00 Introduction to cost of capital
- 0:43 Defining cost of capital and its role
- 1:13 The return cycle: funding, investing, earning
- 2:12 Risk versus return in financing
- 3:33 Hierarchy of creditors explained
- 4:14 Terminology: cost versus return
- 4:43 Ranking finance sources by risk
About this lesson
The video recaps how cost of capital has been used in net present value and internal rate of return calculations, then explores the fundamental question: where does this rate come from, and what determines it? You'll discover how risk and return are linked—why debt is cheaper than equity, how the hierarchy of creditors reflects payment priority, and how to rank different sources of finance by risk level. This foundation is essential for understanding how to calculate a weighted average cost of capital for your organisation, a key concept across ACCA and CIMA financial management papers.
Duration: 6m
Transcript
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