Love is a battlefield...and so is the management of firms.
Take the underinvestment problem, for example: a battle between shareholders and debt holders. Almost every time, the shareholders win...but only in the short-run. In the long-run, everybody loses.
The underinvestment problem is when a firm shoulda/coulda/woulda made an investment that is a clear winner—yet it doesn’t happen, because the firm is already in debt, as it’s “leveraged," and if it took on more debt, then its debt payments would be too high to fill the pockets of shareholders.
If it took on this smart investment, it would be a good thing in the long-run...otherwise, it wouldn’t be a good investment. That means it’d be good for shareholders in the long-run, too. Probably.
But that would take short-term sacrifice, and shareholders are shareholders for their dividends, so...unless shareholders agree to sacrifice short-term payouts for potential long-term benefits, a firm has an underinvestment problem. Remember, the underinvestment problem only happens if a firm is already leveraged, and isn't able to take out equity in the company to do the job instead.
Related or Semi-related Video
Finance: What is Hurdle Rate?62 Views
Finance allah shmoop shmoop what is ah hurdle rate Well
a hurdle rate refers to the investment return minimum that
an investment project requires for it to be worth taking
the risk and effort to do it in the first
place All right what does that really mean Well you're
the new ceo of baby's first chainsaw inc a project
manager present to you the opportunity to open a new
line of business called grand pas last chain saw going
into that business will cost you one hundred million box
of initial investment in large print labeling walker accessible attachments
jittery hand stabilizers and some extra denture cream You as
ceo are looking at eight other projects you can afford
to do on ly one and the best of the
eight other projects is a similar product called the unhinged
midlife crisis chainsaw which has been garnering a lot of
early interest That project has return rate of fourteen percent
so the project manager presenting grandpas last chainsaw now has
a hurdle rate that must be above the highest last
hurdle or fourteen percent fourteen percent annualized return got it
and that's as presented by the project manager pitching investment
in the mid life crisis model meaning they think it'll
return fourteen percent a year on the investment Got it
Whichever of those eight competitive project managers presents the most
believable projections for sales and profits that exceed the others
well they'll soon become king of the family chainsaw market
And the ones who don't well let's just say they 00:01:38.855 --> [endTime] use a few extra bodies over in product development
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