The Holy Grail in the Quest for Value (with Alpha Methods and Omega Theories)
Working Paper No. 11, Financial Project Appraisals Working Paper No. 002-03
18 Pages Posted: 17 May 2001
Date Written: March 21, 2003
In the recent writings on valuation, there is no consensus about the correct formulas for calculating the relevant cost of capital in an M & M world. The proliferation of alpha number of methods and omega number of theories for the calculation of the cost of capital is puzzling because in the derivation of the original M & M result, the use of the no-arbitrage argument would suggest that there should only be a single result.
In this non-technical, introductory teaching note, we would like to present a simple, general and unified approach to valuation in an M & M world. The Holy Grail in the Quest for Value (with alpha methods and omega theories) is rho, the required return to unlevered equity.
Note: This paper is available in Vietnamese at http://ssrn.com/abstract=395000
Keywords: Cost-Benefit Analysis, Capital Budgeting, Project evaluation
JEL Classification: D61, G31, H43
Suggested Citation: Suggested Citation