The debt-equity ratio, the dividend payout ratio, growth and the ...

One of the most important problems facing a financial manager is that of choosing from all the available investment projects that set whose acquisition will enhance the value of the firm. That is, he must select that set of proposals whose elements have income streams with a capitalized value greater than their cost. Conversely, his problem is to choose those projects whose cash flows, when discounted at that capitalization rate, havea positive present value. This problem can be separated into two parts-the determination of the cash flow associated with each project and thediscountorcapitaliza- tion rate to be used in computing the present value of these cash flows. The major concern of this thesis is not with the former but with the latter. Its purposeis to identify the factors determining the capitaliza- tion rate and, more specifically, to separate these factors into those associated with the physical assets in which the firm invests and the in- come streams they generate, and those having their origin in the method used to finance those assets. If it would be possible to ascertain what forces influenced the rate at which income streams to a specific firm were capitalized and the mechanisms through which these forces acted, a major step would have been taken toward the solution of the capital budgeting problem. Thus, this thesis has as its focus the capitalization rate. It is meant to be both a theoretical and empirical study, drawing on the relevant parts of - 2 economic analysis to construct a logical and (hopefully) relevant model, and relying on statistical tests to determine its real world validity.