Despite the recent run-up in interest rates, about two-thirds of government bonds worldwide still trade at nominal yields below 1%. Global interest rates undoubtedly remain near record lows and recent increases have been offset by lower risk premia. Corporate hurdle rates, however, are yet to embrace this reality. Is it time to finally lower hurdle rates? What are the consequences of too high a hurdle rate?
Along with the cost of capital, hurdle rates are key factors in corporate decision making, driving valuation, performance assessment and investment decisions. J.P. Morgan surveyed 100 financial executives, portfolio managers and academics on issues related to the cost of equity. A significant majority of survey participants believe the cost of equity dropped by approximately 2% in the post-financial crisis period. In contrast, more than half of those surveyed believe that firms have not lowered their hurdle rates, leading to an increasing disconnect between hurdle rates and cost of capital. We think the time is ripe for a thorough review and potential lowering of hurdle rates.
Hurdle rate action plan
Using a hurdle rate that is not consistent with today’s global dynamics may lead to under- or over-investment or to significant misallocation of capital. This report proposes an action plan for firms to develop and optimize their hurdle rates.
Download a copy of our latest report, It’s time to reassess your hurdle rates.
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