Corporate Finance Seminar

Rosenberg, B. and A. Rudd, 1998, “The corporate uses of beta”, in: The Revolution in Corporate Finance, Stern and Chew, Blackwell Publishers, New York, 58-68.

Introduction: When estimating the company beta the markets indices are used to compare the risk of the company with the risk of what is called the market portfolio.

Discussion point: Beta can be seen as a ‘relative risk’ in relation to all other securities and thus to the market as a whole.

Explanation: According to the academic corporate finance literature, beta has become the most widely applied measure of risk of a specific company. In the corporate use of beta the relevant context of measuring risk is not the individual corporation’s portfolio of assets. The majority rather prefer the cumulative portfolio of all stockholders. Betas are generated (or estimated) by measuring the relation between a company stock movements and movements in the market index or a broad market of common stocks.

Bruner, R.F., K.M. Eades, R.S. Harris and R.C. Higgins, 1998 (spring/summer), “Best practices in estimating the cost of capital: survey and synthesis”, Financial Practice and Education, 13-28.

Introduction: When using the WACC, the firm’s overall WACC is suitable for the firm’s average investments project. When there is an investment project with a different kind of risk profile adjustments must be made.

Discussion point: When dealing with risk which is not the average firm risk is it better to use risk-adjusted discount rates (changing the WACC) then make cash flow adjustments.

Explanation: By using risk adjusted discount rates there will be a financial market that can be use as benchmark to look for investment project that is dealing with similar risk. It depends on the ability to find financial assets that have comparable risk instead of making assumptions about the cash flows.

Graham, J.R. and C.R. Harvey, 2001, “The theory and practice of

corporate finance: evidence from the field”, Journal of Financial

Economics 60, 187-243

Part I

Introduction: The survey analysis of this paper compares different capital budgeting methods and studies how firms evaluate projects. It suggests that Internal Rate of Return (IRR) is the primary method of evaluation. Next to that we have the NPV, adjusted present value, (discounted) payback period and accounting rate of return. Surprisingly one of the most popular technique after IRR and NPV is the payback period.

Discussion point: Is it proper to use the payback period as capital budgeting technique?

Explanation: Financial textbooks have point out different shortcomings of the payback. It ignores the time value of money and cash flows. Yet CEO’s see this method as a popular capital budgeting technique. One clarification for the driving factor of is popularity might be the lack of sophistication.

Graham, J.R. and C.R. Harvey, 2001, “The theory and practice of

corporate finance: evidence from the field”, Journal of Financial