IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/14526.html
   My bibliography  Save this paper

Project selection and equivalent CAPM-based investment criteria

Author

Listed:
  • Magni, Carlo Alberto

Abstract

This article shows that the Capital Asset Pricing Model-based capital budgeting criteria proposed by Tuttle and Litzenberger (1968), Mossin (1969), Hamada (1969), Stapleton (1971), Rubinstein (1973), Bierman and Hass (1973) and Bogue and Roll (1974) are equivalent. They all state that a project is profitable if its internal rate of return is greater than the riskadjusted cost of capital, where the latter is given by the sum of the risk-free rate and a risk-premium which is a function of the systematic risk of the project, itself a function of the project cost.

Suggested Citation

  • Magni, Carlo Alberto, 2007. "Project selection and equivalent CAPM-based investment criteria," MPRA Paper 14526, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:14526
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/14526/1/MPRA_paper_14526.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carlo Alberto Magni, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 3(2), pages 137-140.
    2. Bierman, Harold, Jr & Hass, Jerome E, 1973. "Capital Budgeting Under Uncertainty: A Reformulation," Journal of Finance, American Finance Association, vol. 28(1), pages 119-129, March.
    3. 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 601-613, May.
    4. Donald L. Tuttle & Robert H. Litzenberger, 1968. "Leverage, Diversification And Capital Market Effects On A Risk‐Adjusted Capital Budgeting Framework," Journal of Finance, American Finance Association, vol. 23(3), pages 427-443, June.
    5. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-756, December.
    6. Stapleton, Richard C, 1971. "Portfolio Analysis, Stock Valuation and Capital Budgeting Decision Rules for Risky Projects," Journal of Finance, American Finance Association, vol. 26(1), pages 95-117, March.
    7. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
    8. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-181, March.
    9. Stapleton, Richard C, 1974. "Capital Budgeting under Uncertainty: A Reformation: Comment," Journal of Finance, American Finance Association, vol. 29(5), pages 1583-1584, December.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Magni, Carlo Alberto, 2007. "CAPM and capital budgeting: present versus future, equilibrium versus disequilibrium, decision versus valuation," MPRA Paper 5468, University Library of Munich, Germany.
    2. Magni, Carlo Alberto, 2009. "Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?," European Journal of Operational Research, Elsevier, vol. 192(2), pages 549-560, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Magni, Carlo Alberto, 2009. "Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?," European Journal of Operational Research, Elsevier, vol. 192(2), pages 549-560, January.
    2. Magni, Carlo Alberto, 2007. "CAPM and capital budgeting: present versus future, equilibrium versus disequilibrium, decision versus valuation," MPRA Paper 5468, University Library of Munich, Germany.
    3. Magni, Carlo Alberto, 2005. "Theoretical Flaws In The Use Of The Capm For Investment Decisions," MPRA Paper 6330, University Library of Munich, Germany, revised Nov 2007.
    4. Carlo Alberto Magni, 2008. "CAPM‐based capital budgeting and nonadditivity," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 26(5), pages 388-398, August.
    5. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    6. Carlo Alberto Magni & Ken V. Peasnell, 2015. "The Term Structure of Capital Values:An accounting-based framework for measuring economic profitability," Department of Economics 0060, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    7. John McDonald, 2010. "The Q theory of investment, the capital asset pricing model and the capitalization rate in real estate valuation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(14), pages 1133-1143.
    8. Jongmoo Jay Choi & Frank J. Fabozzi & Uzi Yaari, 1989. "Optimum Corporate Leverage With Risky Debt: A Demand Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 129-142, June.
    9. Roland Pérez, 1971. "Décisions financières et valeur de l'entreprise. Deux approches néo-classiques alternatives," Revue Économique, Programme National Persée, vol. 22(5), pages 792-811.
    10. Robert A. Taggart, Jr., 1989. "Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes," NBER Working Papers 3074, National Bureau of Economic Research, Inc.
    11. Hayette Gatfaoui, 2010. "Capital Asset Pricing Model," Post-Print hal-00589904, HAL.
    12. David Yechiam Aharon & Yossi Yagil, 2019. "The Impact of Financial Leverage on Shareholders’ Systematic Risk," Sustainability, MDPI, vol. 11(23), pages 1-23, November.
    13. Kusano, Masaki, 2018. "Effect of capitalizing operating leases on credit ratings: Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 45-56.
    14. Magni, Carlo Alberto, 2005. "Firm Value and the mis-use of the CAPM for valuation and decision making," MPRA Paper 7093, University Library of Munich, Germany.
    15. A. Rashad Abdel†Khalik, 1990. "Specification problems with information content of earnings: revisions and rationality of expectations and self†selection bias," Contemporary Accounting Research, John Wiley & Sons, vol. 7(1), pages 142-172, September.
    16. Bavesh M Patel, 1999. "A Critical Review of the Paper," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 24(1), pages 37-40, January.
    17. François-Éric Racicot & Raymond Théoret, 2022. "Tracking market and non-traditional sources of risks in procyclical and countercyclical hedge fund strategies under extreme scenarios: a nonlinear VAR approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-56, December.
    18. Clark, Brian & Jones, Jonathan & Malmquist, David, 2023. "Leverage and the cost of capital for U.S. banks," Journal of Banking & Finance, Elsevier, vol. 155(C).
    19. Hikmet Akyol & Selim Basar, 2024. "Empirical Analysis of Turkish Banking Sector Institutional and Macroeconomic Determinants of Risks," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 73(74-1), pages 59-98, June.
    20. Mościbrodzka Monika & Homa Magdalena, 2019. "The efficiency of an investing in investment funds in the context of a longevity," Journal of Economics and Management, Sciendo, vol. 38(4), pages 107-128, December.

    More about this item

    Keywords

    Capital budgeting; investment decisions; capital asset pricing model; equivalence;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:14526. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.