Still Many Ways to Skin a Capital Cost

Harvard Business Review

knew that firms were making heavy use of the capital asset pricing model (CAPM) to size up growth opportunities, but that the model was only as good as its inputs. But that article was written a decade ago, and still the CAPM rules — and as for how to come up with the crucial inputs to it, well, practice remains all over the map. Not at all, he said, because it's "no secret that applying the CAPM is as much an art as financial science." The same is true for the CAPM. ".

DCF 14

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

Harvard Business Review

This is the key finding of the Current Trends in Estimating and Applying the Cost of Capital research released this week by the Association for Financial Professionals, a trade group of 16,000 corporate treasury and finance practitioners. AFP conducted the Cost of Capital Survey in October 2010 and received answers from 309 chief financial officers, treasurers, vice presidents-finance, and assistant treasurers. Budgeting Finance Strategic planning CAPM

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

Harvard Business Review

In particular, we are interested in how many of their responses correlate with what academic finance knows and what it teaches. For instance, despite the prominent role that discounted cash flow valuation methods play in academic finance courses, few PE investors use discounted cash flow or net present value techniques to evaluate investments. Furthermore, few PE investors explicitly use the capital asset price model (CAPM) to determine a cost of capital.

CAPM 12

What the Great Fama-Shiller Debate Has Taught Us

Harvard Business Review

I think he got the Nobel nod (instead of somebody like Andy Lo , or Mordechai Kurz , or Roman Frydman ) because he was (1) very early to the game, (2) a macroeconomist (the Nobel people generally seem more comfortable with macro than with finance), and (3) most suited to being shoehorned into a narrative of steady scientific progress. Shiller’s paper was hugely controversial at the time, and if you bring it up with old-guard finance professors they still tend to grumble about it.

CAPM 12

Why Those Guys Won the Economics Nobels

Harvard Business Review

He got his PhD at Yale under Shiller’s supervision in 1984, but since then he has also done a lot of work expanding on Fama’s ideas about risk and return, some of it co-authored with Fama’s son-in-law and University of Chicago finance colleague, John Cochrane. Back in the ‘60s, people developed the capital asset pricing model [CAPM] as a way to do that. But it is a very basic rewrite of how to think about finance, and it has swept all before it in the academic world.

CAPM 12

Stop Trying to Predict Which New Products Will Succeed

Harvard Business Review

Such predictions provide both magnitude and time horizon (or at least one of the two); finance tools like the CAPM and Black-Scholes formulas give us partially-specified predictions — value without time; Newtonian physics gives us a “law”, fully-specified predictive theory, completely deterministic and accurate for the directly observable world. When is it possible to predict a product’s success?