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| Author: | McNulty, J.J. (et al.) |
| Title: | What's your real cost of capital? |
| Journal: | Harvard Business Review
2002 : OCT, VOL. 80:10, p. 114-121 |
| Index terms: | Accounting Finance CAPM Capital costs Discount rate Volatility Models USA |
| Language: | eng |
| Abstract: | In valuing any investment project or corporate acquisition, executives must decide what discount rate to use in their estimates of future cash flows. The traditional approach is to apply the capital asset pricing model (CAPM), which has remained fundamentally unchanged for 40 years. But the formula, particularly its beta element, has long been a source of frustration. As an alternative to CAPM and its beta element, the study developes a forward-looking approach to calculating a company's cost of capital, the market-derived capital pricing model (MCPM). Using GE as an example company, the article gives step-by-step instructions for how to calculate discount rates with MCPM. |
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