Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt).
Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics.
What is an investment or a project?
Any decision that requires the use of resources (financial or otherwise) is a project. Broad strategic decisions
- Entering new areas of business
- Entering new markets
- Acquiring other companies
- Management decisions
- The product mix to carry
- The level of inventory and credit terms
- Decisions on delivering a needed service
- Lease or buy a distribution system
- Creating and delivering a management information system
What is Risk?
Risk, in traditional terms, is viewed as a ‘negative’. Webster’s dictionary, for instance, defines risk as “exposing to danger or hazard”. The Chinese symbols for risk, reproduced below, give a much better
Description of risk. The first symbol is the symbol for “danger”, while the second is the symbol for “opportunity”, making risk a mix of danger and opportunity
A danger results into opportunity that create a living in a means of mind blowing/thinking on the way to earn a living.
"Think, Innovate, Create"