TY - JOUR
AU - Myers,Stewart C.
AU - Ruback,Richard S.
TI - Discounting Rules for Risky Assets
JF - National Bureau of Economic Research Working Paper Series
VL - No. 2219
PY - 1987
Y2 - April 1987
DO - 10.3386/w2219
UR - http://www.nber.org/papers/w2219
L1 - http://www.nber.org/papers/w2219.pdf
N1 - Author contact info:
Stewart C. Myers
MIT Sloan School of Management
100 Main Street, E62-620
Cambridge, MA 02142
Tel: 617/253-6696
Fax: 617/258-6855
E-Mail: scmyers@mit.edu
Richard S. Ruback
Morgan Hall 495
Graduate School of Business
Harvard University
Soldiers Field Road
Boston, MA 02163
Tel: 617/495-6422
E-Mail: rruback@hbs.edu
AB - This paper develops a rule for calculating a discount rate to value risky projects. The rule assumes that asset risk can be measured by a single index (e.g., beta), but makes no other assumptions about specific forms of the asset pricing model. It treats all projects as combinations of two assets: Treasury bills and the market portfolio. We know how to value each of these assets under any theory of debt and taxes and under any assumption about the slope and intercept of the market line for equity securities. Our discount rate is a weighted average of the after-tax return on riskless debt and the expected return on the portfolio, where the weight on the market portfolio is beta.
ER -