Project Valuation: Price Forecasts Bound to Discount Rates

2021 ◽  
Author(s):  
Babak Jafarizadeh ◽  
Reidar B. Bratvold
Keyword(s):  
Cash Flows ◽  
Capital Asset Pricing ◽  
Discount Rates ◽  
Capital Asset ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Project Valuation ◽  
Hurdle Rate ◽  
Future Cash Flows

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

Paginas Amarelas

2017 ◽  
pp. 1-26
Author(s):  
Robert F. Bruner ◽  
Mario Wanderley
Keyword(s):  
Risk Premium ◽  
Cash Flows ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Rates Of Return ◽  
Asset Pricing Model ◽  
Telephone Directory ◽  
Rate Of Returns ◽  
Student Discussion

This case serves as a foundation for student discussion of the estimation of required rates of return (ROR) on investments in emerging markets. An associate in J.P. Morgan's Latin America M&A department (mergers and acquisitions) is assigned the task of valuing the telephone directory operations (“paginas amarelas” means “yellow pages”) of a large Brazilian conglomerate. All cash flows have been converted to U.S. dollars, and present values computed for various discount rates. The remaining step is to determine the appropriate target rate of returns for dollar flows originating in Argentina, Brazil, and Chile. The capital asset pricing model (CAPM) is used along with a political risk premium and country beta. The necessary figure work is comparatively light, leaving the student time to reflect on the need for various adjustments in estimating crossborder rates of return.

Time-Varying Risk Premiums in the Framework of Wine Investment

2016 ◽  
Vol 11 (3) ◽  
pp. 355-378 ◽  
Author(s):  
Eric Le Fur ◽  
Hachmi Ben Ameur ◽  
Benoit Faye
Keyword(s):  
Financial Crisis ◽  
Risk Premium ◽  
Capital Asset Pricing ◽  
Conditional Heteroskedasticity ◽  
Time Varying ◽  
Pricing Model ◽  
Capital Asset ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Jel Classifications

AbstractThis article examines the time-varying risk premium with reference to investments in fine wines. Unlike previous studies, our article focuses on this issue within the context of the financial crisis. To do this, we propose the use of a conditional capital asset pricing model and a multivariate generalized autoregressive conditional heteroskedasticity model on several appellation wines worldwide. We find that Bordeaux fine wines were more volatile during the financial crisis and are less volatile in non-crisis periods. In addition, while the volatility of Burgundy wines is second only to Bordeaux wines, non-French fine wines (Australia, Italy, and USA) exhibit inverse volatility trends to French fine wines. (JEL Classifications: C50, G01, G11, Q13)

scholarly journals Economic Premium Principles in Insurance and the Capital Asset Pricing Model

1987 ◽  
Vol 17 (2) ◽  
pp. 141-150 ◽  
Author(s):  
Heinz H. Müller
Keyword(s):  
Asset Pricing ◽  
Capital Market ◽  
Stock Exchange ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Insurance Company ◽  
Pricing Model ◽  
Capital Asset ◽  
Risk Premiums ◽  
Asset Pricing Model

AbstractAn insurance company is considered as an intermediary between policyholders and the capital market. By applying the traditional and the generalized version of the capital asset pricing model, a class of premium principles can be derived. This class is fully compatible with Bühlmann's economic premium principle. Moreover, insurance premiums can be directly related to risk premiums on the stock exchange.

The Capital Asset Pricing Model and Market Microstructure

CFA Digest ◽  
1999 ◽  
Vol 29 (4) ◽  
pp. 96-96
Author(s):  
Frank T. Magiera
Keyword(s):  
Asset Pricing ◽  
Market Microstructure ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model

A Single Period Stochastic Model for Maximising Firms Value

GIS Business ◽  
2016 ◽  
Vol 11 (6) ◽  
pp. 39-45
Author(s):  
J. P. Singh
Keyword(s):  
Capital Market ◽  
Firm Value ◽  
Capital Asset Pricing ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Value Maximization ◽  
Risk Return ◽  
Bankruptcy Costs ◽  
Single Period ◽  
Debt Capacity

This article sets up a single period value maximization model for the firm based on stochastic end-of-period cash inflows, stochastic bankruptcy costs and taxes based on income rather than wealth. The risk-return trade-off is captured in the Capital Asset Pricing Model. Thus, the model also assumes a perfect capital market and market equilibrium. The model establishes the existence of a unique optimal financial leverage at which the firm value is maximized, this leverage being less than the maximum debt capacity of the firm.

Sign in / Sign up

Export Citation Format

Share Document