Assessing Discount Rate for a Project Financed Entirely with Equity Capital

Abstract

Estimating discount rate for an investment project is one of the most challenging tasks incapital budgeting. In this paper we discuss different kind of models for cost of equity capital proposed infinance literature (static CAPM, conditional CAPM, APT, build-up model), focusing especially on advantagesand disadvantages of using each of them. In the final section, we estimate the discount rate fora 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.