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

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  • Ian R. C. Hirst
  • Jo Danbolt
  • Eddie Jones

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 β into β 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

  • Ian R. C. Hirst & Jo Danbolt & Eddie Jones, 2008. "Required Rates of Return for Corporate Investment Appraisal in the Presence of Growth Opportunities," European Financial Management, European Financial Management Association, vol. 14(5), pages 989-1006, November.
    • Handle: RePEc:bla:eufman:v:14:y:2008:i:5:p:989-1006
    DOI: 10.1111/j.1468-036X.2007.00406.x
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    References listed on IDEAS

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    Cited by:

    1. Manuel Rocha Armada & Lawrence Kryzanowski & Paulo Jorge Pereira, 2011. "Optimal Investment Decisions for Two Positioned Firms Competing in a Duopoly Market with Hidden Competitors," European Financial Management, European Financial Management Association, vol. 17(2), pages 305-330, March.
    2. Jo Danbolt & Ian Hirst & Eddie Jones, 2011. "The growth companies puzzle: can growth opportunities measures predict firm growth?," The European Journal of Finance, Taylor & Francis Journals, vol. 17(1), pages 1-25.

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