imported>Doug Williamson |
imported>Doug Williamson |
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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.
| | ''Bank credit ratings''. |
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| | Issuer Credit Rating. |
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| The hurdle rate can be used in two ways:
| | For a bank, its issuer credit rating takes account of the likelihood and degree of any external public authority support, as well as the bank's credit strength as an independent entity. |
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| *As a target Internal rate of return, that proposals need to exceed.
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| *As a discount rate (r) to apply in Net present value analysis, to discount the future cash flows.
| | The ''issuer'' credit rating is contrasted with separate ratings for particular ''issues'' of securities. |
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| :<span style="color:#4B0082">'''Example 1 - Internal Rate of Return (IRR)'''</span>
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| :Our organisation's hurdle rate is 7%.
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| :A proposal has an Internal rate of return of 5%.
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| :The IRR is lower than our hurdle rate.
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| :Accordingly, the proposal is rejected.
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| :<span style="color:#4B0082">'''Example 2 - Net Present Value (NPV)'''</span>
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| :Our organisation's hurdle rate is 7%.
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| :We use 7% to discount a proposal's future cash flows.
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| :If the Net present value is less than 0, the proposal will be rejected.
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| Hurdle rates are usually set with reference to the organisation's weighted average cost of capital.
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| They may be adjusted for different classes of project, with different levels of risk.
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| Riskier projects, or classes of project, would be allocated a higher hurdle rate.
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| == See also == | | == See also == |
| * [[Cost of capital]] | | * [[Credit rating ]] |
| * [[Discount rate]] | | * [[Issue]] |
| * [[Internal rate of return]] | | * [[Issuer]] |
| * [[Net present value]] | | * [[SACP]] |
| * [[Rate of return]]
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| * [[Weighted average cost of capital]]
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| [[Category:The_business_context]] | | [[Category:The_business_context]] |
| [[Category:Corporate_finance]]
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| [[Category:Investment]]
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Bank credit ratings.
Issuer Credit Rating.
For a bank, its issuer credit rating takes account of the likelihood and degree of any external public authority support, as well as the bank's credit strength as an independent entity.
The issuer credit rating is contrasted with separate ratings for particular issues of securities.
See also
