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Discounting Rules for Risky Assets

  • Stewart C. Myers
  • Richard S. Ruback
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    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.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2219.

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    Date of creation: Apr 1987
    Date of revision:
    Publication status: published as Discounting Rules for Risky Assets, November 1992 (with R. Ruback)
    Handle: RePEc:nbr:nberwo:2219
    Note: ME
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    1. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 719-730, September.
    2. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    3. Myers, Stewart C & Turnbull, Stuart M, 1977. "Capital Budgeting and the Capital Asset Pricing Model: Good News and Bad News," Journal of Finance, American Finance Association, vol. 32(2), pages 321-33, May.
    4. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    5. Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August.
    6. Franks, Julian R & Hodges, Stewart D, 1978. "Valuation of Financial Lease Contracts: A Note," Journal of Finance, American Finance Association, vol. 33(2), pages 657-69, May.
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