Growth Options, Beta, and the Cost of Capital

Details

Serval ID
serval:BIB_C86D0975F211
Type
Article: article from journal or magazin.
Collection
Publications
Title
Growth Options, Beta, and the Cost of Capital
Journal
Financial Management
Author(s)
Bernardo  A., Chowdhry  B., Goyal  A.
ISSN
0046-3892
Publication state
Published
Issued date
2007
Peer-reviewed
Oui
Volume
36
Number
2
Pages
5-17
Language
english
Abstract
We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities.. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine aproject beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.
Keywords
Asset price dynamics, corporate-investment, cross-section, returns, risk, duration, equity, valuation
Web of science
Create date
07/07/2009 13:32
Last modification date
20/08/2019 15:43
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