Necessity of risk adjusted hurdle rates for companies, Finance Basics

Assignment Help:

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.

 

 


Related Discussions:- Necessity of risk adjusted hurdle rates for companies

Legal rules - factors influencing dividend, Legal Rules - Factors Influenci...

Legal Rules - Factors Influencing Dividend a) Net purchase rule States that dividend may be paid from company's profit either past or present. b) Capital impairment r

Example of stock market index, Example of Stock Market Index The follo...

Example of Stock Market Index The following six companies constitute the index of democratic republic of Kusadikika.             Company  A  B

Determination of the coupon rate, The partners are still unhappy about one ...

The partners are still unhappy about one of the features of your analysis, namely your assumption that the coupon rate of the bond is equal to 6% per annum. Their thinking is that

Assignment, Discuss the applicabilty of such cycle to poultry business(cons...

Discuss the applicabilty of such cycle to poultry business(consider broilers)

Formation of sole proprietorship business, Formation of Sole Proprietorship...

Formation of Sole Proprietorship Business When an individual plans to start a business, his or her main objective is to earn profit but there are a number of factors to take in

Determine inventories of a firm, A firm's current ratio is 1.5, and its qui...

A firm's current ratio is 1.5, and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?   a Current Ratio

Relationship among money, Relationships and interactions among money, bond,...

Relationships and interactions among money, bond, stock and mortgage markets

Financial analysis, Bell is considering two marketing options for the Canad...

Bell is considering two marketing options for the Canadian launch of their internet-based video streaming service in the first quarter of 2012.   i. A  "soft" launch using prima

Maintain highest degree of accuracy, How can you maintain highest degree of...

How can you maintain highest degree of accuracy in reporting? For maintaining the highest degree of accuracy in reporting, we need to use the same chart of accounts being used

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd