Michael Mauboussin - Pattern Recognition and Public Markets (EP.370)
Capital Allocators – Inside the Institutional Investment Industry
Hurdle Rate vs. Cost of Capital in Corporate Decision Making
Companies often use a conservative hurdle rate of around 15% in their decision-making process, despite the actual cost of capital being lower. This results in companies not taking advantage of periods of easy money to invest more or take on leverage. Companies build up cash balances and behave counterintuitively to economic predictions, leading to the question of why companies do not align their actions with traditional financial theories.
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