For too long many cooperatives assumed that equity had no cost because they were not required to pay dividends. Cooperative managers and directors now recognize that equity has a cost, in the form of an opportunity cost, sometimes called the hurdle rate. You can never know exactly what the blended opportunity cost is for all of your members. Many argue that it is higher than the rate of interest paid on debt. When a business evaluates financial leverage the overriding factor should be its ability to generate cash flow, both to service debt and to meet the necessary opportunity costs or hurdle rate.
Opportunity costs vary by situation.
For example, opportunity costs may be lower in an arid climate where irrigation is unavailable. Irrigated areas with higher value alternatives may have higher opportunity costs. It is not enough to measure cash flow against history and expected economic conditions. What-if questions help determine whether the opportunity cost or hurdle rate can be met under various economic conditions. Another way of looking at cash flow is in terms of the projected revenues from the new assets being considered.