Harvard Business Review

MARCH 1, 2024

While many executives and investors were thrown by last year’s interest rate increases, the cost of capital needn’t be a threat. Companies that integrate the cost of capital into their strategy and planning reap real benefits. When something is cheap, people waste it.

EPS 28

EPS Cost of Capital Strategy Cost 28

Harvard Business Review

APRIL 30, 2015

You’ll likely be asked to show that the return on the investment will be better than your company’s cost of capital. What is the cost of capital? “The cost of capital is simply the return expected by those who provide capital for the business,” says Knight. Further Reading.

Cost of Capital 8

Cost of Capital Cost Finance Discount 8

Harvard Business Review

OCTOBER 5, 2023

With cost of capital this low, many managers have paid scant attention to the time value of money — an essential concept in doing financial analysis. In the United States, short-term interest rates have been near zero for most of the last 15 years.

Cost of Capital 28

Cost of Capital Short-term Management Analysis 28

Harvard Business Review

MARCH 10, 2011

It's the opening paragraph of a Harvard Business Review article called "What's Your Real Cost of Capital?" They believed managers needed a better way to come up with a number to represent their cost of capital, and that's what they were presenting. That paragraph isn't my own writing. by James J. McNulty, Tony D.

CAPM 15

CAPM Cost Discounted Cash Flow Cost of Capital 15

Harvard Business Review

SEPTEMBER 8, 2014

The goal of strategy is profitable growth, meaning economic value above the firm’s cost of capital. Smartly reducing assets devoted to activities that earn less than their cost of capital requires good links with evolving market realities. ( Isn’t that a function of risk parameters and the debt-to-equity ratio?

Debt to Equity Ratio 14

Debt to Equity Ratio Cost of Capital Strategy Incentives 14

Harvard Business Review

JUNE 22, 2016

The use of FinTechs allows suppliers to access funding at the multinationals firm’s lower cost of capital.). The supplier gives the buying firm a discount on the invoice amount at the buyer’s lower cost of capital. the supplier gets $9,959 of the $10,000).

Supply Chain 14

Supply Chain Cost of Capital Transportation Finance 14

Harvard Business Review

APRIL 16, 2012

Strategic cash usually is invested in high quality short-term securities; this ensures safety and liquidity, but produces a meager return on investment—especially in a low interest rate environment—and does not achieve the company's cost of capital. How Should You Approach Strategic Cash?

Company 15

Company Cost of Capital Finance Long-term 15

Harvard Business Review

SEPTEMBER 8, 2011

Banks aren't looking for cheaper capital; they are looking for lower risk. Cost of capital is passed on to the businesses borrowing the money so it is not a huge factor for lenders.) Thus, the government must find a way to reduce the risk for the banks while reducing the cost of capital for the businesses.

GDP 15

GDP Planning Cost of Capital Banking 15

Harvard Business Review

MAY 24, 2017

Invest human capital just like you invest financial capital. For financial capital, the business world has developed concepts such as the opportunity cost of capital, which is reflected in a company’s weighted average cost of capital.

Human Capital 16

Human Capital Management Company ROCE 16

Harvard Business Review

FEBRUARY 2, 2012

Today, only 9% of businesses in the world have achieved even a modest level of sustained, profitable growth over the past decade on average (5.5%, earning cost of capital) and that is declining — even though virtually all the businesses aspire to something like this or more.

Competitive Advantage 15

Competitive Advantage Porter Goleman Emotional Intelligence 15

Harvard Business Review

APRIL 16, 2015

Unless your company’s return on capital exceeds its cost of capital, no amount of revenue growth can create value. For the many firms whose cost of capital and return on capital are roughly equal, in fact, the only path to value creation is to increase return on capital.

CEO 8

CEO ROIC Cost of Capital Merton 8

Harvard Business Review

FEBRUARY 7, 2011

Take, for instance, a group of companies that currently have high returns on invested capital (ROIC). If you follow that group over time, you would see their ROICs revert back toward the cost of capital. As important, the rate of reversion to the mean is a function of the relative contribution of luck.

Skills 17

Skills ROIC Sports Cost of Capital 17

Harvard Business Review

JUNE 27, 2012

real revenue and profit growth and earning their cost of capital has steadily declined. Only 9% of companies achieved even a modest level of sustained and profitable growth. In the past decade, the percentage of companies achieving even 5.5% Yet almost every business aspires to do this.

Creativity 15

Creativity Long-term Kotter Cost of Capital 15

Harvard Business Review

MAY 4, 2012

Less Volatility in Stock Price: The net effect of providing guidance is arguably a less volatile stock price, which can result in a lower beta and a lower cost of capital. FD) constraints.

CFO 15

CFO Metrics Price Depreciation 15

Harvard Business Review

FEBRUARY 1, 2018

The cost of capital is at historic lows, averaging below 6% for most large U.S. Indeed, for most companies, the value of accelerating growth greatly exceeds the value of returning capital to shareholders. The intrinsic value of a company with growing cash flows doubles every time the discount rate is cut in half.

Supply Chain 13

Supply Chain CEO Discount Retail 13

Harvard Business Review

APRIL 5, 2017

Repaying such profits to shareholders through share repurchases is better than misinvesting that cash to diversify into unrelated businesses in which management has no expertise or overinvesting in projects that may not return cost of capital. As I said earlier, measuring a company’s short-term orientation is incredibly tricky.

EPS 12

EPS Metrics Depreciation Short-term 12

Harvard Business Review

OCTOBER 15, 2013

At many companies the total cash investment in acquisitions, R&D, and fixed assets has not earned back its cost of capital after adjusting for the time lag in realizing incremental benefits. That outcome reflects the wrong allocation and/or ineffective execution.

P&L 10

P&L Fixed Assets Charan Delegation 10

Harvard Business Review

OCTOBER 3, 2011

A CEO's job is about resource allocation with a goal of earning a return in excess of the opportunity cost of capital. The challenge is figuring out how to allocate human and financial capital to its best and highest use for the long term. This requires difficult trade-offs.

Short-term 15

Short-term Long-term Price CEO 15

Harvard Business Review

SEPTEMBER 4, 2017

This has not only resulted in less investment in human capital but has also delivered lower total shareholder returns despite a period in which the cost of capital (and thus the cost of investing for growth) has been extraordinarily low. It’s not money that’s in short supply; it’s good growth ideas.

Human Capital 16

Human Capital Kaizen Agility Energy 16

Harvard Business Review

OCTOBER 25, 2018

To analyze the superstar dynamics of firms, our metric was economic profit, a measure of a firm’s profit above and beyond opportunity cost. (To To do this, we take the firm’s returns, deduct the cost of capital, and multiply by the firm’s total invested capital.)

Industry 15

Industry Company GDP Bottom-up 15

Harvard Business Review

JUNE 26, 2015

Managing death more effectively can provide numerous benefits: It can boost profits significantly, lower the cost of capital, and reduce complexity in operations, which can improve the performance of concepts that are in the early and midlife stages.

Retail 8

Retail Cost of Capital Price Discount 8

Harvard Business Review

SEPTEMBER 13, 2017

Our research has found that embedded sustainability drives financial performance through mediating factors such as innovation, operational efficiency, risk reduction, employee recruitment, engagement and retention, customer and supplier loyalty, competitive advantage, reduced cost of capital, and improved marketing and sales.

Supply Chain 9

Supply Chain Net Present Value Retail Cost of Capital 9

Harvard Business Review

OCTOBER 13, 2015

The way to do that is to build market share in international markets at a level of profitability that is higher than the cost of capital. If international operations are earning above the cost of capital, the only thing shareholders should really care about is growth in market share.

EPS 8

EPS Short-term Cost of Capital Long-term 8

Harvard Business Review

APRIL 26, 2017

Banks’ cost of capital is typically 50 basis points or less. These low-cost and reliable sources of funds are from taxpayer-insured deposits and the Federal Reserve’s discount window. ” Can banks out-compete the disruptors?

Banking 16

Banking Stage-Gate Credit Scoring Competitive Advantage 16

Harvard Business Review

JULY 25, 2017

Some companies establish a threshold for MROI that takes into account its risk tolerance and cost of capital, below which they are hesitant to make investments. In its simplest form, it looks like this: The goal, as with any ROI calculation, is to end up with a positive number, and ideally as high a number as possible.

ROI 9

ROI Marketing Marketing Mix Short-term 9

Harvard Business Review

NOVEMBER 7, 2012

You start by using analysts' reports and other sources to gauge the consensus expectations for value drivers — sales growth, operating profit margins, cost of capital and other factors that determine cash flows.

Price 8

Price Analysis Cost of Capital Disruptive Innovation 8

Harvard Business Review

APRIL 23, 2015

The basic principles are: If you want to earn above the cost of capital (if you want to create value), you must get a higher return on your efforts than the average competitor. To get a higher return than the average competitor, you must have an advantage or you must compete in an unusually attractive sector.

Strategy 8

Strategy Porter Price Cost of Capital 8

Harvard Business Review

NOVEMBER 4, 2014

Divestment can theoretically address this market failure by limiting investment by the fossil fuel industry by depressing company valuations and thereby increasing the cost of capital. For many companies, most of the capital expenditures are financed from internal cash flows and bank financing.

Finance 8

Finance Cost of Capital Constraint Price 8

Harvard Business Review

NOVEMBER 4, 2014

Divestment can theoretically address this market failure by limiting investment by the fossil fuel industry by depressing company valuations and thereby increasing the cost of capital. For many companies, most of the capital expenditures are financed from internal cash flows and bank financing.

Finance 8

Finance Cost of Capital Constraint Price 8

Harvard Business Review

DECEMBER 13, 2017

Investors punish companies with a short-term orientation by applying higher discount rates to them, which increases the cost of capital for those companies. In contrast, companies with a long-term orientation are rewarded with a lower cost of capital, which allows them to afford more innovation—a virtuous cycle.

Short-term 9

Short-term Decentralization Company Trends 9

Harvard Business Review

NOVEMBER 20, 2013

Companies run by decisive CEOs rack up more economic profit — what’s left of operating profit after the cost of capital is subtracted – than competitors do. Whatever the degree of change required at your company, make it. Returns to shareholders of reallocating firms are strong.

Strategy 9

Strategy McKinsey Strategic Planning Cost of Capital 9

Harvard Business Review

MAY 14, 2013

Share prices for European utilities and industrial companies have fallen too, threatening a wave of credit downgrades and increasing companies'' cost of capital. That means future carbon-credit auctions, which help fund clean-energy initiatives, will yield lower revenue.

Price 11

Price Energy Politics Marketing 11

Harvard Business Review

MAY 25, 2018

Today’s low cost of capital creates a powerful financial incentive to put money to work by investing in a portfolio of ideas and capabilities. Companies will need to double down on what works and quickly cull the losers.

Incubator 9

Incubator Insurance Cost of Capital Competitive Advantage 9

Harvard Business Review

JULY 31, 2017

Based on our recent worldwide survey of 2,000 incumbent companies across all major industries and countries, we estimate that the average return on incumbent digital initiatives is below 10% — barely above the cost of capital.

Strategy 9

Strategy ROI Technology Cost of Capital 9

Harvard Business Review

SEPTEMBER 26, 2016

My minimums would be: treating employees well, having a positive impact on the environment, living within the spirit (not just the letter) of the relevant laws, and earning a return above the cost of capital. Such a system would make managerial choices as clear-cut and straightforward as pursuing shareholder value maximization.

Objective 8

Objective Cost of Capital Bottom-up Environment 8

Harvard Business Review

AUGUST 27, 2015

Companies in the top one-fifth of profitability earn, in aggregate, about 70 times more economic profit (accounting profit less cost of capital) than those in the middle three-fifths combined, according to McKinsey’s database of 3,000 large, publicly listed, nonfinancial U.S. Consider what’s happening among corporations.

ROIC 8

ROIC McKinsey GDP Company 8

Harvard Business Review

AUGUST 20, 2018

This is ironic, of course, because studies show the majority of acquisitions don’t earn the cost of capital for the buyer. When a S&P500-sized company gets sold, the average premium over the prevailing stock price that is paid for the right to take over that company is in excess of 30%.

Hedge 8

Hedge TSR Company Sample 8