Required Rates of Return for Corporate Investment Appraisal in the Presence of Growth Opportunities

18 Pages Posted: 16 Oct 2008

See all articles by Ian R. C. Hirst

Ian R. C. Hirst

Heriot-Watt University

Jo Danbolt

University of Edinburgh Business School

Eddie Jones

affiliation not provided to SSRN

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 - into - 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.

Suggested Citation

Hirst, Ian R.C. and Danbolt, Jo and Jones, Eddie, Required Rates of Return for Corporate Investment Appraisal in the Presence of Growth Opportunities. European Financial Management, Vol. 14, Issue 5, pp. 989-1006, November 2008, Available at SSRN: https://ssrn.com/abstract=1283999 or http://dx.doi.org/10.1111/j.1468-036X.2007.00406.x

Ian R.C. Hirst (Contact Author)

Heriot-Watt University ( email )

School of Management Riccarton
Edinburgh EH14 4AS, Scotland
UNITED KINGDOM
0131 451 3555 (Phone)
0131 451 3008 (Fax)

Jo Danbolt

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Eddie Jones

affiliation not provided to SSRN ( email )

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