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CAPM and capital budgeting: present versus future, equilibrium versus disequilibrium, decision versus valuation

  • Magni, Carlo Alberto

This paper deals with the use of the CAPM for capital budgeting purposes. Four different measures are deductively drawn from this model: the disequilibrium Net Present Value, the equilibrium Net Present Value, the disequilibrium Net Future Value, the equilibrium Net Future Value. While all of them may be used for accept-reject decisions, only the equilibrium Net Present Value and the disequilibrium Net Future Value may be used for valuation, given that they are additive. However, despite their additivity, the latter are not always reliable metrics, because they do not signal arbitrage opportunities whenever there is some state of nature for which they are decreasing functions with respect to the end-of period cash flow. In this case, the equilibrium value of a project is not the price it would have if it were traded in the security market. This result is the capital-budgeting counterpart of Dybvig and Ingersoll’s (1982) result.

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File URL: http://mpra.ub.uni-muenchen.de/5468/1/MPRA_paper_5468.pdf
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File URL: http://mpra.ub.uni-muenchen.de/15786/1/MPRA_paper_15786.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5468.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:5468
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  1. Lewellen, Wilbur G, 1977. "Some Observations on Risk-Adjusted Discount Rates," Journal of Finance, American Finance Association, vol. 32(4), pages 1331-37, September.
  2. Stapleton, Richard C, 1974. "Capital Budgeting under Uncertainty: A Reformation: Comment," Journal of Finance, American Finance Association, vol. 29(5), pages 1583-84, December.
  3. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-81, March.
  4. Bogue, Marcus C & Roll, Richard, 1974. "Capital Budgeting of Risky Projects with "Imperfect" Markets for Physical Capital," Journal of Finance, American Finance Association, vol. 29(2), pages 601-13, May.
  5. Bierman, Harold, Jr & Hass, Jerome E, 1973. "Capital Budgeting Under Uncertainty: A Reformulation," Journal of Finance, American Finance Association, vol. 28(1), pages 119-29, March.
  6. Magni, Carlo Alberto, 2007. "Project selection and equivalent CAPM-based investment criteria," MPRA Paper 14526, University Library of Munich, Germany.
  7. Ukhov, Andrey D., 2006. "Expanding the frontier one asset at a time," Finance Research Letters, Elsevier, vol. 3(3), pages 194-206, September.
  8. Ekern, Steinar, 2006. "A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One?," Discussion Papers 2006/6, Department of Business and Management Science, Norwegian School of Economics, revised 25 Apr 2007.
  9. Senbet, Lemma W & Thompson, Howard E, 1978. "The Equivalence of Alternative Mean-Variance Capital Budgeting Models," Journal of Finance, American Finance Association, vol. 33(2), pages 395-401, May.
  10. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," The Journal of Business, University of Chicago Press, vol. 55(2), pages 233-51, April.
  11. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
  12. Carlo Alberto Magni, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(2), pages 137-140.
  13. Carlo Alberto Magni, 2007. "Project selection and equivalent CAPM-based investment criteria," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(3), pages 165-168.
  14. Litzenberger, Robert H. & Budd, Alan P., 1970. "Corporate Investment Criteria and the Valuation of Risk Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(4-5), pages 395-419, December.
  15. Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany.
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