Abstract
In valuing any investment project or acquisition, executives must decide what discount rate to use to estimate the value of the projected cash flows. This paper argues that the traditional approach, which bases its estimate of the company's cost of capital on the Capital Asset Pricing Model, places the company at risk. Specifically, beta is unreliable and captures only a portion of the risk that managers and shareholders agree are important. The authors then offer an alternative measure - reflecting a company's total risk - that they say provides a reliable estimate and is consistent with the evolving theory of strategic management.
