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Applied International Finance II, Second Edition by Thomas O'Brien

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CHAPTER 3

Hurdle Rates for Overseas Operations

Many companies consist of different business operations in the form of divisions and subsidiaries. For a company’s individual business operations, the cost of capital is a concept that is central to valuation, investment (and divestment) decisions, measures of economic profit, and performance appraisal. Finance theory says that an operation has a cost of capital based on that specific operation’s risk.

An operation’s cost of capital is typically the basis of the operation’s hurdle rate. In principle, if the operation’s actual rate of return is not expected to be at least the operation’s hurdle rate, the operation is not adding shareholder value to the parent company. Alternatively, if the present ...

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