1. avatar says

    Dear John,
    Can you please let me know the brief meanings for “cost of capital”? I have searched on net but they are not giving a good brief understanding

    Though I am aware of concept but I cant make proper meanings of it.

    Many Thanks

    • Avatar of John Moffat says

      It is the cost to the company of their long-term finance – effectively the interest that they are having to pay on their borrowings.

      The long term finance borrowed from debt lenders will involve paying interest.
      The long-term finance raised from shareholders does not involve paying interest, but shareholders will be requiring dividends and that is effectively like paying interest.

      (You have posted this under a lecture on internal rate of return, but there is no direct connection. You should watch my introductory F9 lecture and also my lectures on Cost of Capital itself.)

      • avatar says

        I am grateful to you for coming to my confusion and being so quick. I do apologize for the mistake.

        Many Thanks

  2. avatar says

    Dear sir,

    Technically IRR is the rate at which NPV becomes zero. So if the current COC used to appraise the project is more than IRR means NPV will become negative which will lead to rejection. At the same time a current COC used for the appraisal below IRR will give a positive NPV which will lead to acceptance. So if the current return rate is more than IRR means should we reject the project. Please correct me if i am wrong.

    • Avatar of John Moffat says

      Yes – the definition of the IRR is that it is the rate of interest at which the NPV is zero.

      What you have written is correct (although your next to the last sentence says ‘the current return rate…..’. You mean ‘the current cost of capital….’ (But you already said that earlier :-) )

  3. Avatar of hamzaharoon says

    Thanks Sir Its a Great Lecture, However I was confused at the part where you instead of subtracting a Positive and Negative NPV you added them, but in the end of the lecture in different example You Subtracted Both Positive NPVs to get IRR, is this a trick or a formula? Anyways thanks sir :)

      • Avatar of hamzaharoon says

        I Remember When I was in school and when I was taught Algebric Division, The Sign of the Second number was changed whenever we try to add or subtract For E.g we wrote +20 and below it +15 but in algebric division rule we change the sign of second number i.e now it is -15 so we subtract 15 from 20, Similarly in Vice Versa +25 is written and below -10 so we change the sign of second number i.e +10 so we added both 25 + 10. hmm now I think I Understood,its the same rule which applies here Thank you Sir :)

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