Quick test: Two banks “A” and “B” offer interest rates of 2 percent and 5 percent on deposits, respectively. All else being equal, at which bank would a rational person prefer to deposit their savings?
If you chose “B” (the correct answer) your financial acumen exceeds that of many Japan CEOs. The country loses its fair share of foreign inward investment because most CEOs do not understand that global investors, like domestic savers, have a choice. Who would forgo the opportunity of earning 3 percent more over the 2 percent hurdle benchmark rate set by bank “A”? Not a rational person.
Global investors scour the globe in search of companies producing shareholder returns greater than their hurdle rate. Calculating the hurdle for firms is more complex than is our simple bank savings deposit example, but the same idea applies. Firms whose return on equity exceeds their hurdle attract investment. Those which do not are discarded.
For corporate Japan, the hurdle rate is … continue reading at The Japan Times
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