A new relationship is derived for net present value (NPV) per dollar invested that is composed entirely of interest rates. The rates are mark-ups to the cost of capital, each mark-up being an internal rate of return (IRR) embedded in the complex plane. The result has been shown before, but only...

We derive explicit sharp bounds on the distribution of the number of defaults from a pool of obligors with common probability of default and default correlation. These bounds are extremely wide, implying that default probabilities and default correlations only very loosely determine estimates of...

Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (BIS) as well as central banks of all countries as a way of monitoring and managing market risk and as a basis for setting regulatory minimum capital standards. The revised Basle Accord, implemented in January...

We develop and implement a method for comparing the measurement error in estimates of the expected rate of return on equity. We combine the Campbell [1991] and Vuolteenaho [2002] return decomposition with the econometric method described in Garber and Klepper [1980] and Barth [1991] to infer...

This article analyzes excess returns generated by corporate spinoffs with respect to changes in investment policies of the spun-off companies. Following the spin-off, the best performing spun-off companies with low growth opportunities exhibit a significant reduction in investment and the best...

This paper offers outlines of a new model for valuing income-producing illiquid assets (stocks of private companies in industries not quoted on public exchanges, intangible assets, income-producing specialized real property etc) where the valuation is for purposes of determining...

Discounting cash flows requires an equilibrium model to determine the cost of capital. The CAPM of Sharpe (1964) and the intertemporal asset pricing model of Merton (1973) offer a theoretical justification for discounting at a constant risk adjusted rate. Two problems arise with this...

Traditional capital budgeting models price only systemic risk. However, insurers and banks seek to manage their total risk. With the help of modern information systems and information technology, bankers and insurers are able to get timely information on the risk exposures of their multiple...

This paper presents a new derivation of the Modigliani and Miller (1958, 1963, 1966) propositions using the simple model of capital market equilibrium with incomplete information presented in Merton (1987). The model is used to relate the maximization of stockholder expected utility to the...

I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics - viz., the PEG...