Interactions of Corporate Financing and Investment Decisions - Implications for Capital Budgeting

  • Myers S
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Abstract

THE RESULTS OF BAR YOSSEF'S COMMENTARY PAPER FOLLOW THE ADJUSTED PRESENT VALUE APPROACH AND DO NOT IMPAIR ITS USEFULNESS, BUT THEY ILLUSTRATE THAT WHAT HAS BEEN SUGGESTED AS CONSTRAINTS AND LIMITATIONS OF THE WEIGHTED AVERAGE COST OF CAPITAL CAN BE RELAXED. THE VALUE OF THE TEXTBOOK FORMULA DOES NOT DEPEND ON THE FULL SET OF ASSUMPTIONS LISTED BY MEYERS. MEYERS REPLIES THAT THE APPROPRIATE COST OF CAPITAL FOR A FIRM OR ASSET DEPENDS ON ITS CASH FLOW PATTERN. THE TEXTBOOK FORMULA GIVES THE VALID HURDLE RATE IF THE PROJECT UNDER CONSIDERATION HAS THE SAME CASH FLOW PATTERN AS THE FIRM. SPECIAL CASES OCCUR WHEN THE FIRM IS COMPOSED OF ONE PERIOD ASSETS, WHEN THE FIRM IS A PERPETUITY, AND WHEN THE FIRM IS ON A STEADY STATE GROWTH PATH. EQUATIONS.

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Authors

  • Stewart Myers

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