Why Sit on All that Cash? Firms Uncertain on Cost of Capital

Harvard Business Review

In estimating the cost of equity, nearly nine out of ten organizations use the capital asset pricing model (CAPM), which calculates the cost of equity using a risk-free rate, beta factor, and a market risk premium, each of which introduces significant variability. Given that the historical spread between 90-day Treasury bills and 30-year Treasury bonds is approximately 3 percent, this wide variation in choices for the risk-free rate will have dramatic effects on project valuation.

Why Those Guys Won the Economics Nobels

Harvard Business Review

Back in the ‘60s, people developed the capital asset pricing model [CAPM] as a way to do that. A mini-glossary: beta is the amount that an individual stock fluctuates relative to the overall stock market, and the equity premium is the difference in expected return between stocks and a “riskless” asset such as Treasury bonds.]. And the theory that was available then was CAPM. But everybody still uses the method that came out of CAPM.

CAPM 12