Review of: “ PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS ” MAX S. PETERS: McGraw-Hill Book Company,New York, 1958. 511 pp. $11.00

This paper presents a review, some explanations, and some comments on each of the two preceding articles on the above subject. The unit-summation procedure of calculating the depreciation of group properties by the straight-line depreciation method, which was referred to in Part I and Part II of this series, is introduced. Details of its procedure are compared and contrasted with the equal-life group plan in order to show the fundamental similarity between the two procedures, even though the basic premises are not quite the same.

The Szabo-Henter development, explained in Part II of the series and reviewed briefly in this paper, showed what the total accumulated recoupment of the cost of a vintage would be at any age if the forecast of the annual retirements is that they are constant. The equal-life group (unit-summation) procedure was utilized to demonstrate the appropriateness of the mathematics.

In conclusion, the contrasts between the vintage-group technique (often called the “average-life procedure”) and the equal-life group (unit-summation) procedure are amplified.     

A Review of: “UNCERTAINTY AND ITS EFFECT ON CAPITAL INVESTMENT ANALYSIS,” by Martin B. Solomon,Jr. Management Science,Volume 12, No. 8, April 1966

In this paper we extend Thompson's [17] work using time series models within the discounted cash flow framework to estimate the cost of equity capita] for a firm. In particular we do the following: First, we prove the existence and uniqueness of a solution for the cost of equity capital. Secondly, we verify that the cost of equity function is continuously differentiable and derive the formula for its reliability. Formulas for both the cost and its reliability are in terms of infinite sums or infinite dimension matrices. Thirdly, we derive estimators of the cost of equity capital and its reliability which are in terms of finite sums and easy to calculate. We show that these estimated converge to the cost of equity capital and its reliability. Finally, our procedure for estimation applies to a wide variety of time series models that may be used to forecast dividends.     

Review of: “ EXPERIMENTS ON DECISIONS WIDER RISK: THE EXPECTED UTILITY HYPOTHESIS ” by Paul J. H. Schoemaker,Martinos Nijhoff Publishing,Boston, 1980, xxii + 211 pages,list $18.95.

Almost every capital budgeting textbook has a chapter on the weighted average cost of capital (WACC). Though this is theoretically satisfying, it does not describe how companies actually operate. The WACC calls for a balanced capital structure in which debt and equity are utilized at some predetermined percentage. The problem is that researchers have shown that firms try to avoid selling new shares whenever possible. This leads to the pecking order theory in which firms first use internal funds, then low-risk debt, then high-risk debt, and finally, as a last resort, new common stock. There is no attempt to balance the capital structure. This survey study basically confirms that approach.