Journal of Financial Economics Vol. 5 No. 1 1977
Risk-adjusted discount rates and capital budgeting under uncertainty
Abstract
This paper is concerned with the valuation of multiperiod cash flows in a world where prices are determined according to the Sharpe-Lintner-Black model of capital market equilibrium. We find that the current market value of any future net cash flow is the current expected value of the flow discounted at risk-adjusted discount rates for each of the periods until the flow is realized. The discount rates are known and non-stochastic, but the rates for the different periods preceding the realization of a cash flow need not to be the same, and the rates relevant for a given period can differ across cash flows. The risk adjustments in the discount rates arise because of uncertainties about reassessments through time of the expected value of a flow and the relationships between these reassessments and the corresponding reassessments of the expected cash flows of all firms.
- DOI
- 10.1016/0304-405x(77)90027-7
- Volume
- 5
- Issue
- 1
- Pages
- 3-24
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex