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A New Model For Calculating Required Return On Investment

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Executive Summary

It is widely accepted that the required return on investment is regarded as the weighted average cost of capital. The method for deciding whether an investment should be executed relies on the weighted average cost of capital; for example, NPV or IRR is presented in many textbooks as fundamental consideration. This method is theoretically appropriate in only a few models, such as the Modigliani-Miller (1963) hypothesis. Because other factors, such as financial distress costs and agency costs, are now generally recognized and applied, the method must be modified.

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