The notion of Net Present Value (NPV) is thought to formally translate the notion of economic profit, where the discount rate is the cost of capital. The latter is the expected rate of return of an equivalent-risk alternative that the investor might undertake and is often found by making recourse to the Capital Asset Pricing Model. This paper shows that the notions of disequilibrium NPV and economic prot are not equivalent: NPV-minded agents are open to framing effects and to arbitrage losses, which imply violations of Modigliani and Miller's Proposition I. The notion of disequilibrium (present) value, deductively derived from the CAPM by several authors and widely used in applied corporate finance, should therefore be dismissed.
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
6359.
Length: Date of creation: Dec 2005 Date of revision:
22 Jun 2008 Publication status: Published in The ICFAI Journal of Applied Finance 10.14(2008): pp. 59-72 Handle: RePEc:pra:mprapa:6359
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