VALUATION AND RISK-ADJUSTED DISCOUNT RATES

There is a continuing controversy as to whether the use of a constant risk adjusted discount rate in capital budgeting decisions implies that the risk of the cash flows increases over time. This paper shows that valuation using these discount rates implies an increasing premium for risk over time but that the increasing premium is due to the net impact of the uncertainty in the cash flow; uncertainty in future market expectations of the cash flow; and changes in the market price of risk. The risk of the cash flow itself need not be increasing over time.     

A NOTE ON TAXATION AND THE LEASING DISCOUNT RATES

It is demonstrated that the discount rate for taxes in the traditional formula for the after-tax cost of debt is misspecified for the UK situation. Several new formulae are derived for the after-tax costs for specific periods, including the accounting period and the tax lag. Iterative solution methods are not required.     

BOUNDING CERTAINTY EQUIVALENT FACTORS AND RISK ADJUSTED DISCOUNT RATES

The risk adjustment parameters of the certainty equivalent and risk adjusted discount rate models are defined under the additive time-state-preference valuation. Bounding numerical values of such parameters before estimation starts is of little help when expected cashflow value is close to zero or if the cashflow is a mixture of contingent in - and outflows. A constant parameter over time involves very restrictive cashflow and valuation assumptions in either model. Intuition may be a poor guide for a priori sefecting a class of time profiles, particularly so if the cashflow changes sign over time.     

ON THE NEGATIVE RISK PREMIUM FOR RISK ADJUSTED DISCOUNT RATES: A REPLY

This short paper shows that the results of Professor Booth's application of the Time State Preference framework to the negative risk premium problem are in fact consistent with the analysis presented in Berry and Dyson (1980). Professor Booth's criticisms of this earlier paper are thereby shown to be invalid. Some further comments are then offered about the phenomenon of negative risk premia.     

RISK-ADJUSTED DISCOUNT RATES-EXTENSIONS FROM THE AVERAGE-RISK CASE

This paper provides an approach for developing risk-adjusted discount rates that follows naturally from the standard presentation of the weighted average cost of capital. In addition to examining the implied assumptions about the valuation of corporate debt, the paper shows the pedagogic advantages of the proposed approach.     

ON THE NEGATIVE RISK PREMIUM FOR RISK ADJUSTED DISCOUNT RATES: A COMMENT AND EXTENSION

This paper develops conditions necessary for negative risk premia to emerge at the market level, and at the individual level in imperfect markets. It also correctly shows how to discount cash outflows. The model used to integrate these topics is the state-preference model of security valuation; the most general model available. The paper corrects serious errors contained in recent work published in the journal.