Portfolio Analysis, Stock Valuation and Capital Budgeting Decision Rules for Risky Projects

The Acquisition Decision as a Capital Budgeting Problem

“…The analyst reduces expected future flows to a certainty equivalent and then discounts at a risk-free discount rate. Alternatively, the random cash flows are discounted at this rate to form a probability distribution of discounted value (see [22] and Hillier [s]) and the value estimated as the certainty equivalent of this random discounted value. However, the 'risk-free rate of interest' cannot just be observed or estimated to a reasonable degree of accuracy.…”

“…The idea of 'systematic' risk is fundamental to the capital asset pricing model of Sharpe [IS] and Lintner [9]. It is defined and used (in a capital budgeting context) in Stapleton [22] [24]). 8 The theory of the effect of financial policy changes on value is by now well developed.…”

Capital Budgeting Under Uncertainty: A Reformulation

“…This paper attempts to provide a normative theory of capital budgeting under uncertainty based on the valuation of corporate securities in a market where investors hold portfolios of financial assets. It builds on recent articles by Fama [1], Hamada [2], Litzenberger and Budd [5] and Stapleton [12] which, in turn, are based on portfolio and market equilibrium theories developed by Markowitz [6], Sharpe [11], Mossin [7,8], Lintner [3], Robichek and Myers [10] and Tobin [13].…”

“…The current market value of the firm's 1. See Stapleton [12], p. 111. [3] discusses the conditions under which a risk-averting investor, whose objective is to maximize expected utility, has indifference curves in mean-standard deviation space that are positively sloping and concave to the origin with expected utility increasing as we move to indifference curves further to the right.…”

“…To accomplish the proof we begin by rewriting (10) We want to show (12) implies (11). Summing (12) and (13b) we have…”