Net Present Value
Weighted Average Cost of Capital
DCF Key Questions
Combine Action Plans
Discount rate considerations
Back to the story
"The boss" had come back from
Starbucks perplexed and now excited. On her desk was a memo from the
CEO inviting her to join the Company's strategy steering committee and
her first task.
about his concerns with recent new product release failures and the process
used to screen new ideas. For years, new ideas had been
funded out of sales revenues as the company grew, but it looks like he
will need to borrow money within the next year to fund new product
introductions. For the next meeting, he had asked her to lead a discussion
on what discount rate to use in the NPV and terminal value
calculations. He needs to provide guidance for the next strategy
retreat, in a month, and wants a leadership perspective.
The CFO also sent a memo suggesting three rates to consider: our
traditional hurdle rate, our weighted average cost of capital, or our
industry's weighted average cost of capital.
her last finance course taken was twelve years ago. It was off
to Google to recall the terms and to Amazon.com to buy
a good book or two on the subject. The gray haired contrarian recommended Martha
Amram's Value Sweep, Chapter Three, for a simple
method and Alfred
Rappaport's Creating Shareholders Value for the nuisances.
Industry data, data sources and a comprehensive discussion of calculation
methods could be found at Prof. Aswath Damadoran's valuation
site at NYU.
At this point, her best tactic for the meeting would be to ask informed
questions and understand the relationships. Why wasn't the CFO leading
The Logic of Value Added
The Hurdle Rate