If my cost of capital is 20% and we assume (big assumption, but let's simplify) that I enter and exit an investment at fair market value, then does the underlying business need to generate a return on capital of at least 20%? Does this required underlying return on capital go down from 20% to say 15% if the business can reinvest and grow earnings? Is there a formulaic relationship that will tell me what growth and ROC minimum combinations I must seek assuming a 20% return target? Thx.

Question

If my cost of capital is 20% and we assume (big assumption, but let's simplify) that I enter and exit an investment at fair market value, then does the underlying business need to generate a return on capital of at least 20%?  Does this required underlying return on capital go down from 20% to say 15% if the business can reinvest and grow earnings?  Is there a formulaic relationship that will tell me what growth and ROC minimum combinations I must seek assuming a 20% return target?  Thx.

vishal_kothari · Answer

http://www.jiskha.com/search/index.cgi?query=money+in+an+account+earns+interest+at+a+continuous+rate+of+8%25+per+year