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A New Approach To Capital Budgeting For Financial Institutions

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Author Info
Kenneth A. Froot
Jeremy C. Stein
Abstract

The classic approach to capital budgeting based on the standard Capital Asset Pricing Model (CAPM) says that the hurdle rate (or cost of capital) for any new project or investment should depend only on the riskiness of that investment. Thus, the hurdle rate, and hence the expected value of the investment, should not be affected by the financial policy of the company evaluating the project. Nor should the hurdle rate be influenced by the company's risk management policy, or by the kind of assets it already has on the balance sheet. 1998 Morgan Stanley.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1745-6622.1998.tb00648.x
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Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

Volume (Year): 11 (1998)
Issue (Month): 2 ()
Pages: 59-69
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Handle: RePEc:bla:jacrfn:v:11:y:1998:i:2:p:59-69

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  3. Décamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoît, 2003. "The Three Pillars of Basel II, Optimizing the Mix," IDEI Working Papers 179, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  4. Kilponen , Juha & Milne, Alistair, 2007. "The lending channel under optimal choice of monetary policy," Research Discussion Papers 33/2007, Bank of Finland. [Downloadable!]
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