The Investment Principle Estimating Hurdle Rates：投资原则估计障碍率.pptVIP

The Investment Principle: Estimating Hurdle Rates “You cannot swing upon a rope that is attached only to your own belt.” First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt) Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics. Inputs required to use the CAPM - The capital asset pricing model yields the following expected return: Expected Return = Riskfree Rate+ Beta * (Expected Return on the Market Portfolio - Riskfree Rate) To use the model we need three inputs: The current risk-free rate (b) The expected market risk premium (the premium expected for investing in risky assets (market portfolio) over the riskless asset) (c) The beta of the asset being analyzed. The Riskfree Rate and Time Horizon On a riskfree asset, the actual return is equal to the expected return. Therefore, there is no variance around the expected return. For an investment to be riskfree, i.e., to have an actual return be equal to the expected return, two conditions have to be met – There has to be no default risk, which generally implies that the security has to be issued by the government. Note, however, that not all governments can be viewed as default free. There can be no uncertainty about reinvestment rates, which implies that it is a zero coupon security with the same maturity as the cash flow being analyzed. Riskfree Rate in Practice The riskfree rate is the rate on a zero