Frequently Asked Questions

Students ask about how a positive retention rate could lead to a negative PVGO.
The answer is that when shareholders are able to get a return higher than the project’s ROE elsewhere, a positive retention rate would lead to a negative PVGO as the company is not as efficient in generating returns as is the share- holder by investing elsewhere. Hence in this situation (ROE < Required return of shareholders) the shareholders would prefer the firm not to invest in its own projects, but to invest themselves in external projects.