Assigning zero to the cost of existing capital use lowers the the investment hurdle rate. EVA© is a registered trademark of Stern Stewart & Co. |
Let me give you an example. Suppose a company had $1000 of debt at 8% and $1000 of equity that they assigned a cost of 0%. With these assumptions, the average cost of capital is 4%. In this environment, when looking at an investment opportunity that yielded a 6% return they would find it to be acceptable. |
No math presented on this screen. |