Working Paper: NBER ID: w2219
Authors: Stewart C. Myers; Richard S. Ruback
Abstract: This paper develops a rule for calculating a discount rate to value risky projects. The rule assumes that asset risk can be measured by a single index (e.g., beta), but makes no other assumptions about specific forms of the asset pricing model. It treats all projects as combinations of two assets: Treasury bills and the market portfolio. We know how to value each of these assets under any theory of debt and taxes and under any assumption about the slope and intercept of the market line for equity securities. Our discount rate is a weighted average of the after-tax return on riskless debt and the expected return on the portfolio, where the weight on the market portfolio is beta.
Keywords: discount rates; risky projects; capital structure; asset pricing
JEL Codes: G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax rates (H29) | discount rates (E43) |
| asset risk (beta) (G12) | discount rates (E43) |
| expected returns from market portfolio (G17) | discount rates (E43) |
| discount rates (E43) | project value (O22) |
| project value (O22) | expected return on investment with identical risk (G11) |
| asset beta (G12) | weight on market portfolio (G11) |