Hello Priyavada,

Thank you for your compliment and for your question.

Let me try to clarify...I am not saying to scrap the intellectual framework for executing corporate finance. Instead, I am saying that capital decision makers need to recognize that costs of capital are artificially held low, and that very low return projects are consequently being approved that would never normally be approved in a regular costs of capital environment. This is creating a large risk for the future of capitalism to my mind.

My suggested framework is for firms to continue to fund themselves with the ridiculously low costs of capital available to them (around 3%) and likely using 100% debt, but to raise their required rates of return back to normalized levels (i.e. 10-12%). This should create an outsized spread and lead to the approval of fewer projects, but they are likely to be "game-changers." Instead, though, corporate finance pros are adjusting their mindsets to only see the world as containing low return, low risk, non-game changing projects.

Once interest rates normalize - i.e. central banks pull back on their massive stimulus activities - then firms can maintain their required rates of return, WACCs will increase, and a return to the normal "relative rates" based capital budgeting will return.

Does this make sense?

Yours, in service,

Jason