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Three Discount Methods for Valuing Projects and the Required Return on Equity


Marc Schauten


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

March 5, 2010


Abstract:     
In this paper we discuss the required return on equity for a simple project with a finite life. To determine a project’s cost of equity, it is quite common to use Modigliani and Miller’s ‘Proposition II’ (1963). However, if the assumptions of MM do not hold, ‘Proposition II’ will lead to wrong required returns and project values. This paper gives an example of how the cost of equity should be determined in order to obtain correct valuations. The methods we apply are the 'Adjusted Present Value' method, the 'Cash Flow to Equity' method and the 'WACC' method.

Number of Pages in PDF File: 24

Keywords: Proposition II, net present value, APV, CFE, WACC

JEL Classification: G12, G31, G32, H43

working papers series





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Date posted: March 6, 2010 ; Last revised: August 31, 2011

Suggested Citation

Schauten, Marc, Three Discount Methods for Valuing Projects and the Required Return on Equity (March 5, 2010). Available at SSRN: http://ssrn.com/abstract=1565470 or http://dx.doi.org/10.2139/ssrn.1565470

Contact Information

Marc Schauten (Contact Author)
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
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