Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (140)	4/5/1998 6:19:00 PM
From: Shane M	Read Replies (1) of 1722

One comment on << What if there is an economic relationship between the cost of capital (interest rates) and Return on Equity? >> Here's another possible argument for higher ROE that I find plausible. Normally, using standard economic thinking, we'd expect a company to borrow a marginal dollar as long as it can achieve a return just higher than the cost of that borrowing. So lower interest rates would be expected to permit lower ROEs. However, in an environment of full employment can we expect companies to be _able_ to expand as they would desire? Perhaps there are increasing situations where companies know they can turn profits, but cannot pursue them all because of limited manpower. This would force companies to allocate to higher ROE projects, and cut profitable but lower ROE expansion. Could this be playing a factor? Shane

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