Necessity of risk adjusted hurdle rates for companies, Finance Basics

Discuss the necessity of risk adjusted hurdle rates for companies with diverse lines of business.

  • Every company invests in new projects based on the expectation of earnings profits. Every investor or lender gives money to a company on the expectation of earning their minimum rate of return. Hurdle rate means the minimum rate of return expected by a company from its capital expenditure projects. Only if the rate of return exceeds the hurdle rate, only then the company should accept the project. As the company can pay back the hurdle rate to the investors and lenders and keep some money for future expansion of projects. This is the rate investors and lenders expect the company to pay to them.
  • Every project may have its own risk and return. Risk will depend upon the variability of the returns. Higher the risk, higher the hurdle rate. There may be some projects such as developing a new product which may be highly risky, as whole money spend on research and development would go waste if the product is not introduced in the market. However, for real estate companies the risk is not very high. If the building are made properly, people will buy the apartments. For eg - healthcare industry has a high hurdle rate due to the inherent high risk of developing vaccines and drugs. For eg - real estate companies have low hurdle rate due to low risk.
  • If the company has one consolidated hurdle rate for its diverse line of businesses, then it may not be able to identify projects which are doing well. High returns generated in one industry might offset the low returns generated by another industry. Proper evaluation of the performance of various line of businesses will be difficult.

 

 

Posted Date: 9/17/2012 9:32:39 AM | Location : United States







Related Discussions:- Necessity of risk adjusted hurdle rates for companies, Assignment Help, Ask Question on Necessity of risk adjusted hurdle rates for companies, Get Answer, Expert's Help, Necessity of risk adjusted hurdle rates for companies Discussions

Write discussion on Necessity of risk adjusted hurdle rates for companies
Your posts are moderated
Related Questions
Potential Investors - Measuring Business Performance Potential investors These parties are interested in a company in total both on long and short term basis in particula

Question 1: (a) What do you meant by the term ‘Life Insurance Contract'? (b) Many people prefer to choose Single life policies compared to Joint life policies. Why is t

ksklklsdfmklsnakakngjkalkgblakbgklabgklagkbaskgbljas a kalks las lgaskgbak a lv aslglaksglas la sla

A firm has the following accounts: What is the net income for the period? Net patient revenue = $1,500,000 Supply expense = $200,000 Depreciation expense = $100,000 Salaries and b

Ask question #MinimQuestion You are the financial accountant of Donald Bhd, a manufacturer and wholesaler of soft drinks. Donald Bhd is in direct competition with Fizz Bhd and Po

Dividend Cover Ratio Dividend cover = EPS/ DPS = Earning to ordinary shares/Dividend paid       This signifies the number of times dividend can be paid from earnin

Analysis of the bond issue (a) Show that the price of the bond is equal to that of a portfolio which contains i) a long position in an option-free but otherwise identical co

1. Find the price of the following bonds. They are all risk-free, and the risk-free rate is 10%. (a) A fifteen-year zero coupon bond with face value $1,000. (b) A three year

Access to Capital Markets and Ownership Structure  Ownership Structure A dividend policy may be driven with Time Ownership Structure as like in small firms whereas manage

Why good judgement is important when making budgeting decisions