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

24 Pages Posted: 6 Mar 2010 Last revised: 31 Aug 2011

Marc Schauten

Vrije Universiteit Amsterdam

Date Written: 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.

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

JEL Classification: G12, G31, G32, H43

Suggested Citation

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

Marc Schauten (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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