To maximize shareholder wealth, a company should generally accept projects with returns that exceed its cost of capital or the expected rate of return demanded by its shareholders. This rate is often referred to as the “hurdle rate” or “required rate of return.” It represents the minimum return that a project should generate to create value for shareholders.
The specific percentage can vary from one company to another and is influenced by factors like the company’s risk profile, the industry it operates in, and prevailing economic conditions. It’s typically determined through financial analysis and reflects the opportunity cost of capital, taking into account factors such as the company’s cost of borrowing and the expected returns available from alternative investments.
In practice, companies use various financial metrics, like the Net Present Value (NPV) or Internal Rate of Return (IRR), to assess whether a project’s returns exceed the hurdle rate. Projects with returns greater than the hurdle rate are generally considered to add value to shareholders and can be pursued to maximize shareholder wealth.