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Single vs. Multiple Discount Rates: How to Limit "Influence Costs" in the Capital Allocation Process

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Author Info

  • John Martin
  • Sheridan Titman

Abstract

Most finance textbooks suggest that companies evaluate investment projects using discount rates that reflect both the debt capacity and the unique risks of the project. In practice, however, companies often use their company-wide WACC to evaluate such investments because of the difficulty of (and subjectivity involved in) estimating the risk of individual projects, and the potential for managerial bias and influence to distort the estimates. Copyright (c) 2008 Morgan Stanley.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1745-6622.2008.00182.x
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Bibliographic Info

Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

Volume (Year): 20 (2008)
Issue (Month): 2 ()
Pages: 79-83

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Handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:79-83

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196

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Cited by:
  1. Tor Brunzell & Eva Liljeblom & Mika Vaihekoski, 2013. "Determinants of capital budgeting methods and hurdle rates in Nordic firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(1), pages 85-110, 03.

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