Subject: discount rates and risk capital
dear vince :
i spent a little bit longer putting together my initial thoughts on
determining discount rates than i originally anticipated . it is somewhat
surprising , but there really isn ' t much academic work that i am aware of
that addresses these issues .
very briefly ,
1 . i think we need to come up with a way to define the concept of risk
capital simultaneously with the appropriate discount rate .
2 . i think it is important to model enron ' s opportunity cost of capital and
how that changes over time . the liquidity of a project will affect its
value in a very significant way when the opportunity cost of capital
changes over time . there is also likely to be a relation between duration
and discount rates that depends on the factors generating enron ' s
opportunity cost of capital .
3 . i have vague ideas about possible simulations that may help us quantify
some of the issues that i have raised .
please take a look at the attached document . you might find this somewhat
confusing , so i will give you a call later in the week to discuss this .
please let me know when you will be free . i look forward to hearing from you .
regards ,
sheridan
- determining discount rates for risky projects . doc
sheridan titman
department of finance
college of business administration
university of texas
austin , texas 78712 - 1179
512 - 232 - 2787 ( phone )
512 - 471 - 5073 ( fax )
titman @ mail . utexas . edu