A problem that often arises in applied finance is one where decision-makers need to choose a value for some parameter that will affect the cash flows between two parties such as a rental rate or an exercise price. Because the values of the cash flows also depend on various unobservable...

We present a model featuring irreversible investment uncertain future demand and capital prices and a regulator who sets the firm's output price at discrete intervals. Using this model we derive a closed-form solution for the firm's output price which ensures that whenever the regulator resets...

We show that regulators' price-setting rate base and allowed rate of return decisions are inextricably linked. Once regulators switch from traditional rate of return regulation the irreversibility of much infrastructure investment significantly alters the results of the usual approach to...

In September 2005 the New Zealand Commerce Commission (NZCC) released a document (TheWeighted Average Cost of Capital for Electricity Lines Businesses by Dr Martin Lally referred to as LINES hereafter) that estimates a weighted average cost of capital (WACC) for New Zealand electricity lines...

Racehorse trainers operate asset management businesses in which the assets owned by outside clients compete with those owned by managers for the latter's time care and attention. Although this potentially leads to serious conflicts of interest we find no evidence of an agency problem: in a...

Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively prescriptions that are difficult to reconcile with the simple mean-variance model. Canner et al. (1997) point out that the first piece of...

We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly...

Real options analysis typically assumes that projects are continuously evaluated and launched at precisely the time determined to be optimal. However real world projects cannot be managed in this way because of the costs of formally evaluating an investment opportunity. This paper analyzes how...

Professor Lewis Evans presented The Required Rate of Return with Sunk Investments at the ISCR forum, The Cost of Capital for the Regulated Firm in August 2003. Two papers associated with this presentation are available for through these links: 'Risk, Price Regulation and Irreversible Investment'...

When interest rates are uncertain the net-present-value threshold required to justify an irreversible investment is increasing in the length of a project's payback period. Thus slowpayback projects should face a higher hurdle than fast-payback projects just as investment folklore suggests. This...