Financial Management is a discipline concerned with the generation and allocation of scarce resources (usually funds) to the most efficient user within the firm (the competing projects) through a market pricing system (the required rate of return). A firm requires resources in form of funds raised from investors. The funds must be allocated within the organization to projects which will yield the highest return. We shall refer to this definition as we go through the subject. 1. 2 Required Rate of Return (Ri) The required rate of return (Ri) is the minimum rate of return that a project must generate if it has to receive funds. It’s therefore the opportunity cost of capital or returns expected from the second best alternative. In general, Required Rate of Return = Risk-free rate + Risk premium