20083 CEM slides

20083 CEM slides - Certainty equivalent method Callahan 1...

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1 Cal ahan 1 Certainty equivalent method Cal ahan 2 First tough question Putting a price on Boomers, Busters, and Bogglers Cal ahan 3 Second tough question Suppose we want to value a project: Assume we have no trouble estimating the expected cash flows. r is a risk-adjusted discount rate (RADR). How do we come up with it? 1. This project is like everything else we do and we are a public company 2. This project is unlike everything else we do, but there exist public companies whose businesses are like this project 3. This project is unlike anything that any public company is doing
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2 Cal ahan 4 DCF Analysis – Is Our Way the Only Way? Our valuation approach has been: 1. Estimate the expected cash flows: 2. Determine an appropriate risk-adjusted discount rate: 3. Discount the expected cash flows at the risk-adjusted discount rate: Is this the only approach? NO! Cal ahan 5 The Certainty Equivalent Method There are some situations where the standard approach [RADR DCF = risk-adjusted discount rate discounted cash flow] will run into trouble. Theoretical and practical:
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20083 CEM slides - Certainty equivalent method Callahan 1...

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