The Holy Grail in the Quest for Value (with Alpha Methods and Omega Theories)

Abstract

In the recent writings on valuation, there is no consensus about the correct formulas for calculating the relevant cost of capital in an M & M world. The proliferation of alpha number of methods and omega number of theories for the calculation of the cost of capital is puzzling because in the derivation of the original M & M result, the use of the no-arbitrage argument would suggest that there should only be a single result.

In this non-technical, introductory teaching note, we would like to present a simple, general and unified approach to valuation in an M & M world. The Holy Grail in the Quest for Value (with alpha methods and omega theories) is rho, the required return to unlevered equity.

Note: This paper is available in Vietnamese at http://ssrn.com/abstract=395000

Keywords: Cost-Benefit Analysis, Capital Budgeting, Project evaluation

JEL Classification: D61, G31, H43