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Theoretical and Applied Economics
No. 9 / 2007 (514)

Assessing Discount Rate for a Project Financed Entirely with Equity Capital

Nicoleta Vintila
Academia de Studii Economice, Bucuresti

Abstract. Estimating discount rate for an investment project is one of the most challenging tasks in capital budgeting. In this paper we discuss different kind of models for cost of equity capital proposed in finance literature (static CAPM, conditional CAPM, APT, build-up model), focusing especially on advantages and disadvantages of using each of them. In the final section, we estimate the discount rate for a certain project financed entirely with equity capital, using a version of build-up model.

Keywords: capital budgeting; discount rate; cost of equity capital; risk-return models; build-up models.

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