article thumbnail

Still Many Ways to Skin a Capital Cost

Harvard Business Review

When executives evaluate a potential investment, whether it's to build a new plant, enter a new market, or acquire a company, they weigh its cost against the future cash flows they expect will spring from it. Not at all, he said, because it's "no secret that applying the CAPM is as much an art as financial science." McNulty et al.

CAPM 12
article thumbnail

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

Harvard Business Review

Only 46 percent use the perpetuity growth model, while 27 percent develop an explicit cash flow forecast for the entire life of a project. Fully 72 percent develop multiple cash flow scenarios representing the expected outcome as well as best- and worst-case outcomes, which are then discounted. Current market debt/equity ratio.

Insiders

Sign Up for our Newsletter

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

article thumbnail

Why Those Guys Won the Economics Nobels

Harvard Business Review

Campbell’s work has also made liberal use of the analytic tools developed by Hansen. Back in the ‘60s, people developed the capital asset pricing model [CAPM] as a way to do that. You’d have this beta with the market, so you have the riskless rate plus beta times the equity premium. That’s kind of a deep insight.

CAPM 8
article thumbnail

What Private Equity Investors Think They Do for the Companies They Buy

Harvard Business Review

We also know that private equity funds have outperformed public equity markets over the last three decades , even after the fees they charge are accounted for. In operational engineering, PE firms develop industry and operating expertise that they bring to bear to add value to their portfolio companies.

CAPM 8
article thumbnail

Stop Trying to Predict Which New Products Will Succeed

Harvard Business Review

How you answer this question may be the most important factor in how you design your product development process — and, ultimately, in whether your business succeeds or fails. Is market performance predictable for a specific product or class of products? Look at the variance of your new-market products. Product development'