Why Sit on All that Cash? Firms Uncertain on Cost of Capital
Harvard Business Review
MARCH 10, 2011
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.