Hurdle rate and Penny shares: Difference between pages

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A hurdle rate is an organisation's rate of return used for determining the viability of a proposed investment or other project.
1.  ''Investment - investment strategies - equities - listed equities.''


An ordinary equity share with a very low current market price.


The hurdle rate can be used in two ways:
A common threshold for classifying a share as a penny share in the UK is a maximum current market price of GBP 0.20 = 20 pence 1 per share.


*As a target Internal rate of return, that proposals need to exceed.


*As a discount rate (r) to apply in Net present value analysis, to discount the future cash flows.
Investing in such shares can be appealing to certain very naive investors, on the basis that the potential for large proportionate gains - for example a doubling of the value per share - could be considered more likely than for a stock with a higher current market price per share.




:<span style="color:#4B0082">'''Example 1 - Internal Rate of Return (IRR)'''</span>
They are generally very high risk investments, and unsuitable for non-professional investors.


:Our organisation's hurdle rate is 7%.


:A proposal has an Internal rate of return of 5%.
2. ''Investment - investment strategies - equities.''


:The IRR is lower than our hurdle rate.
Shares in very small companies, whose shares may have a very low market value per share.


:Accordingly, the proposal is rejected.


== See also ==
* [[Equity]]
* [[Financial Conduct Authority]]  (FCA)
* [[Ordinary shares]]
* [[Penny]]
* [[Penny stock]]
* [[Preference shares]]
* [[Share]]
* [[Stock]]




:<span style="color:#4B0082">'''Example 2 - Net Present Value (NPV)'''</span>
==External link==
 
*[https://www.fca.org.uk/consumers/penny-shares Find out why you should be cautious about investing in penny shares or penny stocks - UK Financial Conduct Authority (FCA)]
:Our organisation's hurdle rate is 7%.
 
:We use 7% to discount a proposal's future cash flows.
 
:If the Net present value is less than 0, the proposal will be rejected.
 
 
 
Hurdle rates are usually set with reference to the organisation's weighted average cost of capital.
 
This will depend on a number of factors, including currency and the risk free rate of return in the relevant currency.
 
 
Hurdle rates may be adjusted for different classes of project, with different levels of risk.
 
Riskier projects, or classes of project, would be allocated a higher hurdle rate.
 
 
== See also ==
* [[Cost of capital]]
* [[Discount rate]]
* [[Internal rate of return]]
* [[Net present value]]
* [[Rate of return]]
* [[Risk free rate of return]]
* [[Risk premium]]
* [[Weighted average cost of capital]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Investment]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]

Latest revision as of 16:09, 10 February 2022

1. Investment - investment strategies - equities - listed equities.

An ordinary equity share with a very low current market price.

A common threshold for classifying a share as a penny share in the UK is a maximum current market price of GBP 0.20 = 20 pence 1 per share.


Investing in such shares can be appealing to certain very naive investors, on the basis that the potential for large proportionate gains - for example a doubling of the value per share - could be considered more likely than for a stock with a higher current market price per share.


They are generally very high risk investments, and unsuitable for non-professional investors.


2. Investment - investment strategies - equities.

Shares in very small companies, whose shares may have a very low market value per share.


See also


External link

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