Electronic Resource
Oxford, UK and Boston, USA
:
Blackwell Publishers Ltd
Journal of business finance & accounting
24 (1997), S. 0
ISSN:
1468-5957
Source:
Blackwell Publishing Journal Backfiles 1879-2005
Topics:
Economics
Notes:
This paper shows that it is not always correct to make an upward adjustment to the stock beta in calculating the hurdle rate for capital budgeting even when the project under consideration is riskier than existing assets. The paper also shows that the correct hurdle rate is smaller than the market capitalization rate calculated from the firm's stock beta when the project under consideration has the same risk as existing assets. In addition, it is shown that the market capitalization rate will be an underestimate (overestimate) of the correct hurdle rate when the risk of future assets is greater (smaller) than both the risk of assets in place and that of future capital expenditures. These new results are direct consequences of the insight that the firm's investment opportunities are in fact real call options written on underlying assets.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1111/1468-5957.00112
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