First Principles

• Invest in projects that yield a return greater than the minimum acceptable hurdle rate.

• The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt)
• Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.

• Choose a financing mix that minimizes the hurdle rate and matches the assets being financed.

• If there are not enough investments that earn the hurdle rate, return the cash to the owners of the business.

• The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics.