Discounting rules for risky assets
Name
35719760.pdf
Size
1.84 MB
Format
Adobe PDF
Checksum (MD5)
aa888406ef7dbcb38ab44d18c688568a
Author(s)
Myers, Stewart C.
Ruback, Richard S.
Date Issued
1993
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 93-001WP.
Abstract
This paper develops a new rule for calculating the discount rate to value risky projects. The rule works under any linear asset pricing model and any equilibrium theory of debt and taxes. If securities are priced by the standard capital asset pricing model, the discount rate is a weighted average of the after-tax Treasury rate and the expected rate of return on the market portfolio, where the weight on the market portfolio is the project beta. We prove that this discount rate gives the correct project value and explain why it works. We also recast the rule in certainty equivalent form, restate it for multifactor capital asset pricing or arbitrage pricing models, and derive implications for the valuation of real options.
Persistent DSpace Link
