Corporate Finance the Investment Decision

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.[i]

Any thorough business model will attempt to measure the risk involved in a particular investment and will therefore provide the necessary return given the risk which becomes the hurdle rate for the project.

Among other things, a good risk and return model should a) come up with standardized risk measures that allows investors to draw individual asset conclusions as to whether its risk is above or below-average, b) “it should translate the measure of risk into a rate of return that the investor should demand as compensation for bearing the risk”[ii] and c) in addition to explaining past returns it should also predict future results.

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[i] Damodaran, Aswath, Applied Coroporate Finance, John Wiley and Sons, Hoboken, NJ p 50, 2004

[ii] Damodaran, Aswath, Applied Coroporate Finance, John Wiley and Sons, Hoboken, NJ p 52, 2004