Business Finance Report: Analysis of Stock Performance and Hurdle Rate

This report provides a comparative analysis of stock performance for companies like Rio Tinto, ANZ Bank, Wesfarmers, and TLS against the All Ordinaries Index. It examines the relationship between the stocks and the market index, concluding that Rio Tinto's shares are not driven by market forces, while Wesfarmers' prices are lower than the industry benchmark. The report also discusses the concept of hurdle rates, which are often set to the weighted average cost of capital (WACC), and their role in evaluating potential investments. It explains the Internal Rate of Return (IRR) and its application in investment analysis, highlighting a scenario where the IRR is greater than the cost of capital, suggesting a positive investment.

Running Head: BUSINESS FINANCE 1
BUSINESS FINANCE

Running Head: BUSINESS FINANCE
Table of Contents
PART A......................................................................................................................................3
PART B......................................................................................................................................3
b).............................................................................................................................................3
References..................................................................................................................................4

Running Head: BUSINESS FINANCE
PART A
The average returns reflected by the companies like Rio Tinto, ANZ Bank,
Wesfarmers and TLS is compared against the All ORDS Index. It can be stated that the RIO
walks opposite of the All Ords Index, whereas ANZ has been ahead All Ords Index. In case
of the Wesfarmers the All Ords Index is far more ahead than the Wesfarmers. The trend lines
of the TLS shows that the it walks around the All ords Index. Therefore it can be concluded
that the shares of Rio are not driven by the market forces, whereas Wesfarmers prices are
lower than the industry benchmark. TLS on the other hand gives the tuff competition to the
All ords Index and hence the shares of the Rio shall be hold, the shares of TLS can also be
kept in the portfolio (Pathak & Gupta, 2018).
PART B
b)
The hurdle rate is frequently set to the weighted normal expense of capital (WACC),
otherwise called the benchmark or cut-off rate. For the most part, it is used to dissect a
potential investment, while taking the risks and foregoing the opportunity costs.
IRR is the rate at which the net present value of the cash flows in equivalent to zero.
The IRR rate in the present case is 31% which is greater than the cost of the capital which is
15%. The investment is positive and investment does more than the breakeven and hence,
Prescott is uneasy in operating at such a hurdle rate as the lower the hurdle rate the more will
be the net present value of the proposal (Scott, 2019).

Running Head: BUSINESS FINANCE
References
Pathak, H. P., & Gupta, S. (2018). Rights Offering and Its Effect on Share Price Movement:
A Study of Commercial Banks. Journal of Nepalese Business Studies, 11(1), 1-13.
Scott, J. T. (2019). Financing and leveraging public/private partnerships: The hurdle-lowering
auction. In The Social Value of New Technology. Edward Elgar Publishing.