Required rates of return for corporate investment appraisal in the presence of growth opportunities

I. R C Hirst, Jo Danbolt, Eddie Jones

    Research output: Contribution to journalArticle

    4 Citations (Scopus)

    Abstract

    Traditional methods of estimating required rates of return overstate hurdle rates in the presence of growth opportunities. We attempt to quantify this effect by developing a simple model which: (i) identifies those companies that have valuable growth opportunities; (ii) splits the value of shares into 'assets-in-place' and 'growth opportunities'; and (iii) splits the equity ß into ß for 'assets-in-place' and 'growth opportunities'. We find growth opportunities for UK companies over the 1990-2004 period to average 33% of equity value. Incorporating the effect of growth opportunities, the average cost of capital for investment purposes falls by 1.1 percentage points. © 2008 Blackwell Publishing Ltd.

    Original languageEnglish
    Pages (from-to)989-1006
    Number of pages18
    JournalEuropean Financial Management
    Volume14
    Issue number5
    DOIs
    Publication statusPublished - Nov 2008

    Keywords

    • Assets-in-place
    • Beta
    • Cost of capital
    • Growth opportunities

    Fingerprint Dive into the research topics of 'Required rates of return for corporate investment appraisal in the presence of growth opportunities'. Together they form a unique fingerprint.

  • Cite this