In theory, a company should pay dividends when its investment opportunities are not expected to generate a return that is as high as its required rate of return
This causes the cost of capital for large corporations to be lower than the required rate of return
on illiquid interests in small business, or even large businesses organized as proprietorships.
A large tax benefit for owner-occupied housing cannot explain why the required rate of return
is so low.
9) It should be noted that discounting takes place at the required rate of return
adjusted for the effect of debt financing as determined by Equations (1) and (2) under the different debt scenarios.
They cover topics including: how an analyst approaches the equity valuation process; the basic DDM; the derivation of the required rate of return
within the context of Markowitz and Sharpes modern portfolio theory; the free cash flow approach; valuation using Graham and Doddtype concepts of earning power and associated "market multiples, as well as residual income models.
So, if the growth rate is zero, earnings are $100K and the required rate of return
is 25%, the price (value) is $400K.
The Group's minimum required rate of return
of 7% was thus significantly surpassed.
In other words, from a financial standpoint, we should not make the investment if our required rate of return
is less than the expected rate of return.
After the value of marketable investment at the entity level is computed, the appraiser applies the QMDM model to account for the fact that the growth in the value of the investment (along with any dividends distributed) does not meet the shareholder's required rate of return
for a specified period.
Also, capital expenditures, for which the justification is based on such non-economic criteria as improving quality to keep customers, would have trouble showing the required rate of return
Given the risks of political changes, a developing legal system, inflation of more than 20 percent in the cities, leased rather than purchasable land and other factors, it's natural for companies to compensate by simply raising the required rate of return
in the investment decision process.
In comparing the consequences of these transfer arrangements it is critical to bear in mind the required rate of return
, the rate of return (discount rate) used in the relevant Treasury tables and the term of the retained interest.