A Spanning Approach for Estimating Divisional Cost of Capital

Mark K. Krueger and Charles M. Linke

Financial Management, 1994, vol. 23, issue 1

Abstract: Two techniques for estimating risk-adjusted divisional hurdle rates are the analytical approach and the pure-play approach. The analytical approach relies upon theoretical linkages between observable accounting variables and the CAPM beta risk measure. The pure-play approach uses information about firms operating in the same line of business. This study develops a third technique, the spanning approach, which combines the advantages of the analytical and pure-play techniques while avoiding their implementation problems.

Date: 1994
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