Question

. Answer the following briefly.

1. What is the metric and its hurdle rate for an “Enterprise” to increase its enterprise value?

2. What is the metric and its hurdle rate for the corporation’s equity to increase its equity value?

3. What is the hurdle rate for the company’s debt, above which the corporation does not benefit from additional debt issues (increased leverage)?

4. How does leverage affect the value of a company? Positive, negative or both?

Answer 1

Answer:

i)

Metric and hurdle rate :

Metric for hurdle rate ,it is otherwise called MARR(Minimum Acceptable Rate of Return)

- >MARR is the minimum required rate of return ,which implies the least sum speculator or investor hopes to get on his investment.

- >For enterprise hurdle rate is minimum ROR(rate of return) for investor ,in light of the fact that the rate is determined by assessing-

• cost of capital,
• opportunities in business expansion,
• risks included...etc.

ii)

From the corporation perspective, we will check the minimum expense to Enterprise from all Borrowing.

iii)

When there is perfect or ideal fund in organization in type of Reserve and surplus it isn't adjustable to issue debt.

iv)

Leverage will affect on return on equity. organization's return on equity increases ,by use leverage.This expands level of risk ,stock unpredictability or voatility. so this can be positive and negative (both) impact on estimation of organization.