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1、CHAPTER9TheCostofCapitalortunemagazineconductsannualsurveysofbusinessleaderstoidentifythemost-admiredU.S.companies.Sincethesurveysbegan,GeneralElectrichasFconsistentlyrankedeitheratorclosetothetopofthelist.AlthoughGE’sstockhasfallensharplyinrecenttimes,liket
2、hatofmostothercompanies,itwasstillineighthplaceintheMarch2009survey.GEisthemostdiversifiedcompanyintheworld.Itoriginallymanufacturedelectricgeneratingequipmentandlightbulbs.Thenitbranchedintoappliancesandindustrialequipmentsuchasjetenginesandlocomotives,then
3、intoinfrastructure,variousindustrialservices,movies,TV,andloanstoindividualsandbusinesses.PeopletendtothinkofGEasanindustrialcompany,butbyfaritslargestunitisGECapital,itsfinanceunit.ThisrelianceonGECapital,combinedwithuncertaintyaboutpotentiallossesonitshuge
4、loanportfolio,wasprimarilyresponsibleforGE’spoorstockpriceperformancein2008–2009.AkeyfactorinGE’slong-runsuccesshasbeenitsfinancialdiscipline:thecompanyisreportedtohavesetauniform“hurdlerate”forpotentialnewinvestmentsandthenacceptedprojectsifandonlyiftheirex
5、pectedreturnsexceedthathurdlerate.Historically,thesamehurdleratewasusedforallprojects—apparentlythecompanydidnotsystematicallyvarytheratetoreflectindividualprojects’perceivedrisks.Projectmanagerswerechargedwithachievingtherateofreturntheyhadforecasted,andcar
6、eersroseorfelldependingonwhetherornotthey“madetheirnumbers.”With20-20hindsight,wecanseethattherewasaflawinGE’slogic.Theeconomyenjoyedastrongupwardtrendfrom1945to2007,sodefaultsonmortgages,corporatedebt,creditcards,andotherdebtinstrumentswererelativelylow.Mor
7、eover,until2009GEwasoneofonlysixnonfinancialcompanieswithaAAAbondrating,whichenabledittoborrowatextremelylowratesandthenre-lendthemoneyatmuchhigherrates.Inthatenvironment,itwaseasyforGECapitaltoforecastreturnsthatexceededthecorporatehurdlerate,andthatledtoth
8、eunit’srapidgrowth.GE’sotherunitshadfewerprojectsthatexceededthecorporatehurdlerate;hence,GECapital’sshareoftotalcorporaterevenues,profits,andespeciallydebtincreasedrapidly.Recently,though,asthe
