How do firms project expected returns on their assets?

Firms project expected returns on their assets primarily by considering the assets' price and growth potential. This approach involves an analysis of various factors that can influence an asset's future performance, such as its current market price, projected future cash flows, potential for capital appreciation, and overall growth in value over time. By evaluating these elements, firms can estimate the returns they might expect from their investments based on both historical performance patterns and future forecasts.

When assessing an asset's growth potential, firms may look at industry trends, economic indicators, and the specific competitive advantages of the asset itself. This focus helps organizations develop a more nuanced understanding of how their assets are likely to perform in the market, which is crucial for effective financial planning and investment strategy. This method is more forward-looking compared to merely relying on past performance or competitive positioning, which is critical in dynamic market environments.