Principles of Corporate Finance

Table 1.1 Corporate Finance Principles

Source: Applied Corporate Finance, Aswath Damodaran

The Investment Decision

Invest in assets that earn a return greater than the minimum acceptable hurdle rate.

The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund it.

The return should reflect the magnitude and the timing of the cash flows as well as all side effects.

The Financing Decision

Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations.

The optimal mix of debt and equity maximizes firm value.

The right kind of debt matches the tenor of your assets: the term of the debt should match the term of the need.

The Dividend Decision

If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business.

How much cash you can return depends on current and potential investment opportunities. In other words, if you can no longer find optimal investments that meet the firm’s hurdle rate, it may be time to distribute.

How you choose to return cash to the owners will depend on whether they prefer dividends or buybacks. Stock buybacks are beneficial for existing shareholders as earnings per share will increase.[i]

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[i] Applied Corporate Finance, Aswath Damodaran, John Wiley and Sons, INC, Hoboken New Jersey, 2006

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