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Enron Mail |
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
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