Discounting Rules for Risky Assets
Stewart C. Myers
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
Richard S. Ruback
Harvard Business School
NBER Working Paper No. w2219
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.
Number of Pages in PDF File: 24
Date posted: April 27, 2000
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