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A. Kraus, R. Litzenberger (1973)
A State-Preference Model of Optimal Financial LeverageJournal of Finance, 28
Nestor Gonzalez, R. Litzenberger, J. Rolfo (2009)
OF FINANCIAL AND QUANTITATIVE ANALYSIS June 1977 ON MEAN VARIANCE MODELS OF CAPITAL STRUCTURE AND THE ABSURDITY OF THEIR PREDICTIONS
James Scott (1976)
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Capital Market Equilibrium with Restricted BorrowingThe Journal of Business, 45
Gonzalez Gonzalez, Litzenberger Litzenberger, Rolfo Rolfo (June 1977)
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Robert Hamada (1969)
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INTRODUCTION THIS PAPER DEVELOPS A RULE which reduces the problem of valuation in the presence of market risk to the problem of valuation in a world where the market price of risk is zero. Given a valuation problem in an intertemporal, continuous time framework, the rule is applied in two steps as follows: We first replace one or more of the model parameters by their "effective values" in a specified way. Then we discount all expected cash flows at the riskless rate of return as if the market price of risk were zero. The broad applicability of the valuation rule is illustrated through the diverse examples of asset valuation, option pricing, determination of the optimal capital structure of a firm, and cash management. We motivate the discussion of this paper by briefly examining a forerunner to our valuation rule, the certainty equivalence approach to evaluating a stream of cash flows. In a single period model, the risk-adjusted net present value RANPV(X) of the cash flow X, realized at the end of the period, is given by the single period Sharpe-Lintner capital asset pricing model (CAPM) as Essentially this formula states that the expected cash flow X is adjusted
The Journal of Finance – Wiley
Published: May 1, 1978
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