We argue that the CAPM may be a reasonable model for estimating the cost of capital for projects in spite of increasing empirical evidence in the literature against the CAPM based on stock returns. As McDonald and Siegel (1985) and Berk, Green and Naik (1999) point out, stocks are backed by...

We argue that the empirical evidence against the Capital Asset Pricing Model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Since stocks are backed not only by projects in place, but also the...

We argue that the empirical evidence against the capital asset pricing model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Because stocks are backed not only by projects in place, but also by the...

We argue that the empirical evidence against the Capital Asset Pricing Model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Since stocks are backed not only by projects in place, but also the...

To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors' consumption, savings, and portfolio decisions. We review the academic literature on firms' cost of...