Session 15

 23-02-2026

This session introduced the Capital Asset Pricing Model (CAPM) and its role in explaining the relationship between risk and expected return. CAPM demonstrates that the return investors demand from an investment depends on the risk-free rate, the market risk premium, and the asset’s beta. The class also covered the concept of cost of debt, which represents the effective interest rate a firm pays on borrowed capital.

This discussion helped me understand how financial theory provides structured frameworks for evaluating investment opportunities and financing decisions. CAPM illustrates that investors require compensation both for the time value of money and for the systematic risk they assume. At the same time, the concept of cost of debt highlighted how firms strategically balance different sources of financing. Since interest payments are tax-deductible, debt financing can reduce the effective cost of capital, influencing a firm’s capital structure decisions. I now see corporate finance as an integrated system where investment evaluation, risk assessment, and financing choices collectively determine long-term value creation.

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