In order to create value,a corporation must earn a rate of return on its invested capital that is higher than the market's required rate of return on that invested capital.

Question

Quizplus · Accepted Answer

This statement is true according to corporate finance theory. If a corporation earns a rate of return on its invested capital that is lower than the market's required rate of return, it may not be generating enough profit to compensate investors for the risks they are taking by investing in the company, and the company's value may decrease. On the other hand, if the corporation earns a rate of return on its invested capital that is higher than the market's required rate of return, it may be generating excess profits that add value to the company and increase its overall worth.

In Order to Create Value,a Corporation Must Earn a Rate