Essay Sample on Hurdle Rate: Min. Returns, Risk Compensation & Investment Components

Introduction

The hurdle rate is minimum returns from an investment done by a business company. Hurdle rate enables companies to make the appropriate decisions and plans on whether to continue with the project or not (Graham and Campbell 10). Also, the hurdle rate represents the compensation for the level of risks related to the plan pursued by the investor or business company. In most cases, riskier projects in a company have the highest hurdle rates. Other than risks, some important investment components to be considered in determining the hurdle rate include returns and the cost of capital. Hurdle rates ensure that the business project or investment is to provide the required returns and prevent the risks of incurring losses in a company.

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A real option is a technique used by business companies and investors in determining the potential investment opportunities. The real options technique involves tangible assets rather than financial materials. Also, real options include the choices and decisions made by the management of a company about it's a market, economic, and technological factors. The application of real options technique enables managers of the company to analyze the opportunity cost and determine whether to continue or abandon the ongoing business project.

Financial flexibility is an approach used by managers and investors to determine how their companies can respond to emerging expenses and utilize the available investment opportunities. Financial flexibility is essential for companies because it enables them to use both cash holdings and leverage based on their debt ratios (Graham and Campbell 18). Also, financial flexibility is crucial in avoiding distress in the company.

Foreign debts are essential because it provides favorable tax treatment for business companies. Also, the developed companies with appropriate international or external exposures are likely to improve their financial operations through the process of issuing foreign debts. Target debt-equity ratio is significant for companies because it describes their financial soundness and abilities to attain business success (Fricke and Fung 34). The rate varies among company industries due to the differences like their capital intensive. Diluted earnings per share is a technique used to determine the assets of a company based on the ability to exercise the convertible securities. They are offering new equity results to lower share prices because it has an impact on market factors. The market price of a share varies depending on the financial assets possessed by the company and the purchasing powers of the customers.

Taxes are the main components that have a lot of impacts on the value of shares in a business. The reduction in the charges from 35% to 21% increased the number of shares and net cash flow in business companies (Graham and Campbell 18). The reduction of taxes increases the debt cost and offset cash flow in the business organizations. Also, the current taxes limit the disadvantages related to value gains. The expected impact of the tax cut is to benefit organizations with negative taxable income. In this case, the companies have realized increased earnings from their investments; therefore, making a lot of profits. The 2017 tax cut has achieved the desired impact because many companies have increased their cash flow after the investment (Graham and Campbell 19). Also, the tax cut has increased the debt cost for many companies in the United States of America (Fricke and Fung 12).

Conclusion

The financial status of the business organizations determines their returns from the investment operations. Financial flexibility is significant in avoiding distress in the firm. Many businesses operating in the United States of America have increased the cost of their shares in the market due to the reduction of taxes by the federal government.

Works Cited

Fricke, Eric, and Scott Fung. "Can Momentum and Other Risk Factors Predict Capital Investment Growth?" Advances in Financial Planning and Forecasting 5 (2012): 231-257. Retrieved from: http://www.airitilibrary.com/Publication/alDetailedMesh?docid=P20110421002-201212-201301030024-201301030024-231-257

Graham, John, and Campbell Harvey. "How do CFOs make capital budgeting and capital structure decisions?" Journal of applied corporate finance 15.1 (2002): 8-23. Retrieved from: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1745-6622.2002.tb00337.