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1、PART4ProjectsandTheirValuationChapter9TheCostofCapitalChapter10TheBasicsofCapitalBudgeting:EvaluatingCashFlowsChapter11CashFlowEstimationandRiskAnalysis333ThispageintentionallyleftblankCHAPTER9TheCostofCapitalortunemagazineconductsannualsurveysofbusinessleaderstoidentifythemost-
2、admiredU.S.companies.Sincethesurveysbegan,GeneralElectrichasFconsistentlyrankedeitheratorclosetothetopofthelist.AlthoughGE’sstockhasfallensharplyinrecenttimes,likethatofmostothercompanies,itwasstillineighthplaceintheMarch2009survey.GEisthemostdiversifiedcompanyintheworld.Itorigi
3、nallymanufacturedelectricgeneratingequipmentandlightbulbs.Thenitbranchedintoappliancesandindustrialequipmentsuchasjetenginesandlocomotives,thenintoinfrastructure,variousindustrialservices,movies,TV,andloanstoindividualsandbusinesses.PeopletendtothinkofGEasanindustrialcompany,but
4、byfaritslargestunitisGECapital,itsfinanceunit.ThisrelianceonGECapital,combinedwithuncertaintyaboutpotentiallossesonitshugeloanportfolio,wasprimarilyresponsibleforGE’spoorstockpriceperformancein2008–2009.AkeyfactorinGE’slong-runsuccesshasbeenitsfinancialdiscipline:thecompanyisrep
5、ortedtohavesetauniform“hurdlerate”forpotentialnewinvestmentsandthenacceptedprojectsifandonlyiftheirexpectedreturnsexceedthathurdlerate.Historically,thesamehurdleratewasusedforallprojects—apparentlythecompanydidnotsystematicallyvarytheratetoreflectindividualprojects’perceivedrisk
6、s.Projectmanagerswerechargedwithachievingtherateofreturntheyhadforecasted,andcareersroseorfelldependingonwhetherornotthey“madetheirnumbers.”With20-20hindsight,wecanseethattherewasaflawinGE’slogic.Theeconomyenjoyedastrongupwardtrendfrom1945to2007,sodefaultsonmortgages,corporatede
7、bt,creditcards,andotherdebtinstrumentswererelativelylow.Moreover,until2009GEwasoneofonlysixnonfinancialcompanieswithaAAAbondrating,whichenabledittoborrowatextremelylowratesandthenre-lendthemoneyatmuchhigherrates.Inthatenvironment,itwaseasyforGECapitaltoforecastreturnsthatexceede
8、dthecorporatehurdlerate,andthatledtotheunit’sra
