...Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle Iwan Meier and Vefa Tarhan1 February 27, 2006 Abstract We survey a cross-section of 127 companies to shed light on various dimensions of the investment decisions. The questions posed by our survey examine the hurdle rates firms use, calculations of project related cashflows, the interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine investment decisions by either using survey data or data obtained from financial tapes, we use both sets of data. This approach produced one of our primary findings that there is a hurdle rate premium puzzle, in that hurdle rates used by our sample of firms exceed their cost of capital that we calculate using Compustat data by 5%. We investigate the determinants of the hurdle premium in question. Additionally, we find that both systematic and to a lesser extent unsystematic risk play a role in determining the hurdle rates. Furthermore, our findings show that while firms use discounted cashflow methods in evaluating projects, they do not always appear to handle the cashflow dimension of their investment decisions in a consistent manner. Finally, we uncover evidence that firms use the various financing alternatives available to them in the order predicted by the pecking-order hypothesis. However, some of the variables affiliated with the trade-off model also appear to play a role in...
Words: 22210 - Pages: 89
...initial velocity of 33.8 m/s. How high does the ball travel above the ground? It goes up and then falls down to the ground below. How much time is it in the air total? [133.3 m, 8.67 s] 6. A ball is thrown straight down from a bridge with an initial velocity of 18.5 m/s. If it travels for 2.3 sec, how high is the bridge? [68.5 m] 7. A ball rolls down a ramp with very little friction. Which of the following is not true? (A) The ball covers a greater distance with each time increment. (B) The ball’s acceleration increases with each time increment. (C) The ball’s velocity increases with each time increment. (D) The distance that the ball covers in one second depends on the time and the ball’s initial velocity. 8. A race car accelerates at a rate of 15.6 m/s2. If it starts from rest, how much time until it is traveling at 325 km/h? [5.79 s] # 9 is on the back 9. A cart travels along a straight section of road. A velocity vs time graph illustrating its motion is graphed to the right. (a)...
Words: 458 - Pages: 2
...arrival rate of 50: 15 seat plane: 352* 6.55/60+30.9*6.55/60*(15*0.65)*50=3565.79 50 seat plane: 672* 6.55/60+30.9*6.55/60*(50*0.65)*50=5554.89 150 seat plane 1590*6.55/60+30.9*6.55/60*(150*0.65)*50= 16618.17 For the arrival rate of 55: 15 seat plane: 352* 12.52/60+30.9*12.52/60*(15*0.65)*55=3531.08 50 seat plane: 672* 12.52/60+30.9*12.52/60*(50*0.65)*55=11665.67 150 seat plane 1590*12.52/60+30.9*12.52/60*(150*0.65)*55= 34908.10 For the arrival rate of 59: 15 seat plane: 352* 60.5/60+30.9*60.5/60*(15*0.65)*59=18278.29 50 seat plane: 672* 60.5/60+30.9*60.5/60*(50*0.65)*59=60422.10 150 seat plane 1590*60.5/60+30.9*60.5/60*(150*0.65)*59= 180836.77 b) According to the FAA definition of delay, the airport would only experience delays at an arrival rate of 59. Therefore, the cost for arrival rates of 50 and 55 for all planes would be 0 as there’d be no delay. For arrival rate of 59, the costs would be the same as part a). I’d expect that a delay of 15 minutes would mean little for the passengers, so the cost per passenger would be negligible as well. It’s also possible that the cost per passenger and operational costs aren’t evenly spread out over an hour (i.e. the first 15 minutes don’t contribute 25% of the cost). Given this information, and given the FAA’s expertise on the matter in the first place, only considering a delay a “delay” after 15 minutes seems reasonable. d) Given the dramatic effect even a small change in arrival rate has...
Words: 427 - Pages: 2
...less space needed for inventory. Disadvantages include not having the product ready on time, and lack of control of time because Dell is depending on its suppliers. When technology was changing, Dell was able to jump on it fast. Dell was the first manufacturer to convert its entire major product line to the Pentium technology. Dell was able to offer faster systems at the same price its rivals were. Since Dell used just in time inventory, Dell was able to update any flawed chips and offer the new Windows 95 system the day it was launched. 2. Dell’s sustainable growth rate in 1995-1996 was: (Sales/Assets)*(Assets/E)*(Net Income/Sales)*(100%) (3,475/1,594)*(1,594/652)*(149/3475)*100% 2.1801*2.44478*.0429*.1 22.89% The actual growth rate is 1996: Ending Sales-Beginning Sales Beginning Sales (5,296-3,475)/3,475=52.40% Since the actual growth rate exceeded the sustainable growth rate which means that Dell was growing beyond what was sustainable which raised a red flag if they could keep in business for a long period of time. 3. We were not given definite rules for completing the pro forma statement. We increased everything as a percent of sales which was not...
Words: 509 - Pages: 3
...The Condition | True or False | attAverage >= verizonAverage | True | tmobileAverarge == 868 | True | verizonAverarge < spirntAverage | False | sprintAverage != attAverage | True | The condition | Expected Ouput | If tmobileAverage > 800 and VerizonAverage > 800 ThenDisplay “Both have average download rates over 800”ElseDisplay “One or both of the averages are less”End If | Both have average download rates over 800 | If sprintAverage == 800 ThenDisplay “Sprint download rate is 800”End If | Sprints download rate is 800 | If attAverage >= 1300 OR tmobileAverage >=900Display “Select either carrier”End If | Select either carrier | Score | Employment Category | Interview Possibility | 85 or above | Definite | Yes | 70- 84 | Likely | Yes | 60-69 | Maybe | Yes | 59 or below | No | No | Main Module() //Declare variable on the next 3 lines //Declare Interger testScore = 0 //Declare String category = “ “ // Declare String inverview = “ “ //Make Module calls and pass necessary variables on the next 4 lines //Module getScore() //Module employCat() //Module interviewPoss() //Module displayInfo() End Main Module getScore(Interger Ref testScore) //Ask the user to enter a test score End Module Module employCat(Integer testScore, String Ref category) //Determine what employment category they are in based on their test score //Similar to if the score is less than 60, then category is “No” //Otherwise, if score is less...
Words: 268 - Pages: 2
...Part I: The Operating Budget for the City of Kyle Texas PAD 505 Public Budgeting and Financ Introduction The city of Kyle, Texas is on its way to becoming a full service community with targets to continue to grow their quality healthcare, higher education, and retail industries for the benefit of the local residents. According to the City Kyle website, Kyle is home to over 60,000 persons with a projected growth rate of 6.9% between 2010 and 2015 (www.cityofkyle.com). These total conflicts with the US Census website, which reports the City of Kyle was home to 29,293 residents in 2011, and had a projection growth of 4.6% (www.census.gov). Following the US Census calculation the population rate for the City of Kyle would project the 2012 population rate to be 30,640. The two totals conflict sufficiently and will evidently cause some confusion with the projected outcomes. The City of Kyle is considered a Home Rule City, a city with an adopted home rule charter for its local self-governance. In addition to being a Home Rule City, the City of Kyle also operates with a City Manager form of Government. The City Council is comprised of a Mayor and six Council Members. The resident voters choose the Mayor and three Council Members at large and the other three Council Members are elected from their prospective districts. The goal of the proposed budget for the City of Kyle is to maintain the current service...
Words: 1631 - Pages: 7
...NEW TDS RATES APPLICABLE (AS PROPOSED IN THE FINANCE BILL, 2009) ` S. No. Particulars Nature of Payment Section IT 1 Salary 192 If recipient is an Individual or HUF Upto 30-09-2009 SC EC Total During 01-10-2009 to 3103-2010 IT SC EC Total IT If the recipient is a Domestic Company or Firm Upto 30-09-2009 SC EC Total During 01-10-2009 to 31-032010 IT SC EC Total SC not applicable. Only levy EC Payment in excess 10.00 of Rs.5,000 p.a Criteria for Deduction As per slab rates prescribed for women, senior citizens and other Individuals. 2 Interest other than interest on securities 194A 10 - - 10.00 10 - - 10.00 10 - - 10.00 10 3a 3b 3c 3d 3e Payments to Contractors (other than 3b to 3e) Payments to transporters, where PAN is not available Payments to transporters, where PAN is available Payments to Advertising Contractors Payments to Sub-contractors 194C 194C 194C 194C 194C 2 2 2 1 1 - - 2.00 2.00 2.00 1.00 1.00 1 1 0 1 1 - - 1.00 1.00 0.00 1.00 1.00 2 2 2 1 1 - - 2.00 2.00 2.00 1.00 1.00 2 2 0 2 2 - - 2.00 2.00 0.00 2.00 2.00 Payment in excess of Rs.2,500 p.a Payment in excess of Rs.1,20,000 p.a Payment in excess of Rs.1,20,000 p.a Payment in excess of Rs.20,000 p.a Payment in excess of Rs.20,000/- per contract or Rs.50,000 p.a 4 Commission or Brokerage 194H 10 - - 10.00 10 - - 10.00 10 - - 10.00 10 - - 10.00 5a Rent...
Words: 540 - Pages: 3
...Five minutes left with fifteen questions remaining. The heart rate increases by twenty beats per minute. “A, C, B, B, B, B, B---” five of the same answer choices in a row, and the heart rate increases by ten more beats per minute. Realization that this test score could cause numerous desirable colleges to decide denial of an application occurs, which causes the heart to race as if the body is running twenty miles per an hour on a treadmill. Having to resort to filling the remaining answer choices with the infamous “Letter of the Day” follows with only thirty seconds left until potential self-destruction. Congratulations, a full-blown panic attack has been incited. Fortunately, not everyone experiences the dread associated with taking the outrageously...
Words: 1123 - Pages: 5
...Introduction The city of Kyle, Texas is on it’s way to becoming a full service community with targets to continue to grow their quality healthcare, higher education, and retail industries for the benefit of the local residents. According to the City Kyle website, Kyle is home to over 60,000 persons with a projected growth rate of 6.9% between 2010 and 2015 (www.cityofkyle.com). This total conflicts with the US Census website, which reports the City of Kyle was home to 29,293 residents in 2011, and had a projection growth of 4.6% (www.census.gov). Following the US Census calculation the population rate for the City of Kyle would project the 2012 population rate to be 30,640. The two totals conflict sufficiently and will evidently cause some confusion with the projected outcomes. The City of Kyle is considered a Home Rule City, a city with an adopted home rule charter for its local self-governance. In addition to being a Home Rule City, the City of Kyle also operates with a City Manager form of Government. The City Council is comprised of a Mayor and six Council Members. The resident voters choose the Mayor and three Council Members at large and the other three Council Members are elected from their prospective districts. The goal of the proposed budget for the City of Kyle is to maintain the current service levels for all necessary city services. The goals and objectives of the City is the guideline for forming the City’s yearly budget. The budget projection is slated...
Words: 1407 - Pages: 6
...Space Utilization Definition of space utilization: a measure of whether or not and how space is being used Measurements of Space Utilization Utilization Rate: * a function of a frequency rate and an occupancy rate Frequency Rate: * measures the proportion of time that space is used compared to its availability Occupancy Rate: * measures how full the space is compared to its capacity Utilization rates can be assessed in terms of both actual use and individual use. Note that a low frequency rate doesn’t mean that a room is not being utilized efficiently or effectively, nor whether any processes need to change. A low frequency rate only means that demand for that space was low during the period of time that was measured. However, when frequency rate is coupled with an occupancy rate, how often and how many occupants are occupying a space during the times the space is populated becomes visible. A low utilization rate may mean that processes need to change. Strategic Importance of Space Utilization Strategic Goals of Measuring Space Utilization: * Identification of the balance between space needs and space provision * Establishment of a basis for space allocation * Identification of best practices; standardization of processes * Observation of space utilization efficiency * Identification and highlighting of areas of under-use and over-use * Identification of the gaps between timetabled use and actual use * Recognition...
Words: 275 - Pages: 2
...This is a two part question. I need an outline created then a final draft for a project on turnover rates. The two files that are attached show the requirements and the second one is the outline template that HAS to be used. The two items are based off the following question: Employee turnover rates are high for many organizations, and you have noticed that the company you work for is no different. Research what other organizations are doing to hire and retain good employees in order to combat the high employee turnover rate. Use this research to make recommendations to the management of your organization. ENGL 216 Formal Report/Proposal Outline Template Your name: Directions: Refer to your textbook (Chapter 2, page 48 and Chapter 10, page 311) and the Week 4 Lecture to complete this outline. Write in complete sentences, not single words or short phrases. Be as detailed as possible, adding in-text citations for all references noted on your References page from Week 3, which should also be included here. The more information you place in this final outline, the less work you will have to do for the report drafts. Introduction: This section sets the stage and purpose of the report. See page 320 in the text for help in completing this section. (Minimum of one sentence per point) Purpose: Description/Background: Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access or to earn money with our Marketplace...
Words: 263 - Pages: 2
...http://homeworklance.com/downloads/acc-260-week-6-presentation-of-the-ceos-position/ ACC 260 Week 6 Presentation of the CEOs Position As the CEO of Kardell I must examine each of the views of the stakeholders and form a course of action concerning the sonox issue. This course of action in which I choose will be solely based on facts and should be in the best interest of the company not on personal feelings of the concerned parties. The proposed plan would involve shutting the plant down for approximately a year and then only partially running for the next year in order to make the necessary upgrades to keep the contamination from happening. The first group’s concerns I will examine will be the investors. Their primary concern is the rate of return they get on their investment. They have come up with an alternative plan to keep from shutting down the plant for the two years. Their argument is that there is no evidence that the Sonox chemical have a negative impact on the environment or the health of the people in the community and because of these facts, the plant should not close for any period of time and loose profits. The next group is the citizens of Riverside. The citizen’s primary concern is the health of the people in their community and the affects of the environment of the contamination of the Sonox chemical that might be going into their water supply. They understand that if the plant must be closed for a period it would hurt their economy in the community but...
Words: 392 - Pages: 2
....CHAPTER 10 Coolbrook Company has the following information available for the past year: | | River Division | Stream Division | Sales revenue | $ | 1,200,000 | $ | 1,800,000 | Cost of goods sold and operating expenses | | 900,000 | | 1,300,000 | | | | | | Net operating income | $ | 300,000 | $ | 500,000 | | | | | | Average invested assets | $ | 1,200,000 | $ | 1,800,000 | | The company’s hurdle rate is 6 percent. | | Required: | 1. | Calculate return on investment (ROI) and residual income for each division for last year. (Do not round your intermediate calculations. Round "ROI" answers to 1 decimal place.) | River Division | Stream Division | ROI | +/-1%25.0 | % | +/-1%27.8 | % | Residual Income | $228,000 | | $392,000 | | | | | | | 2. | Recalculate ROI and residual income for each division for each independent situation that follows: | a. | Operating income increases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.) | | | | | River Division | Stream Division | ROI | +/-1%27.50 | % | +/-1%30.56 | % | Residual Income | $258,000 | | $442,000 | | | b. | Operating income decreases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 1 decimal place.) | | River Division | Stream Division | ROI | +/-1%22.5 | % | +/-1%25...
Words: 2495 - Pages: 10
... Concepts Covered Cost of Equity: Cost of Equity is the minimum rate of return a firm must offer to the shareholders. This is necessary as the shareholders who have taken a risk in investing would be waiting for returns. The formula for Cost of Equity is given by: Cost of Equity = (Dividend per share/ Current Market Value of Stock) * Growth rate of Dividends Cost of debt: - Cost of debt is the effective interest rate that a company pays on its debt. Cost of debt is usually calculated after the interest expenses are deducted Cost of debt = Cost of Debt before tax (i.e. Interest rate) * (1-Tax Rate) WACC: Weighted average cost of capital is one of the measures to calculate the cost of capital of the firm. Weighted Average Cost of Capital is the minimum return a firm must earn on existing assets to keep its stock price constant and satisfy its creditors and owners. [pic] c = weighted average cost of capital y = Expected rate of return on equity (cost of equity) b = Expected rate of return on debt (cost of debt) E = Total market value of equity D = Total debt and leases K = E+D = Total capital invested Tc = Corporate Tax Rate Capital Asset Pricing Model (CAPM) • Asset Pricing Equation: E(ri) = rrf + bi[E(rm)-rrf] , where E(ri) is the expected return on the security. rrf is the risk free rate...
Words: 2487 - Pages: 10
...2005 WACC and Hurdle Rate: Risk drives required returns and is a fundamental concept when determining whether or not a company is providing appropriate returns to its shareholders. Teletech’s policy was to use a uniform hurdle rate across segments. This policy works well if each potential investment has the same risk. Unfortunately for Teletech, investments differ in their level of risk and therefore in their required rates of return. To adequately assess potential investments, Teletech should implement a hurdle rate for each segment and potentially risk-adjust these hurdle rates for projects within each segment. As Teletech’s EVP of Telecommunications Services points out in his graph, a single hurdle rate for varying risk segments can be misleading and cause severe financial damage. Specifically it can lead to profitable projects being rejected and unprofitable projects being approved. In either case, shareholder value is not maximized. Exhibit 1 shows our WACC calculation for the Telecommunications Services (TS) and Product and Systems (PS) segments to be 8.5% and 11.7% respectively. Under Teletech’s single hurdle rate philosophy, projects in the TS segment would be rejected if ROC is projected to be below 9.3% even though they would be adding value if above 8.5%. Possibly even more detrimental, projects in the PS segment would be approved if ROC is above 9.3% even though they would be destroying value if below 11.7%. Additionally, the single rate philosophy will...
Words: 780 - Pages: 4
