Required rates of return for corporate investment appraisal in the presence of growth opportunities

Hirst, I., Danbolt, J. and Jones, E. (2008) Required rates of return for corporate investment appraisal in the presence of growth opportunities. European Financial Management, 14(5), pp. 989-1006. (doi: 10.1111/j.1468-036X.2007.00406.x)

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.

• Item Type: Articles
• Additional Information: The definitive version is available at www.blackwell-synergy.com
• Keywords: cost of capital, beta, growth opportunities, assets-in-place
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Danbolt, Prof Jo
• Authors: Hirst, I., Danbolt, J., and Jones, E.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: European Financial Management
• Publisher: Blackwell
• ISSN: 1468-036X
• Copyright Holders: Copyright © 2008 Blackwell
• First Published: First Published in European Financial Management 14(5)989-1006
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher.