【正文】
is attempt typically takes the form of superimposing on the results of the certainty analysis the notion of a risk discount to be subtracted from the expected yield (or a risk premium to be added to the market rate of interest)。 But what the asset adds is given by capitalizing the stream it generates at the market rate of interest, and this capitalized value will exceed its cost if and only if the yield of the asset exceeds the rate of interest。 According to the second criterion, an asset is worth acquiring if it increases the value of the owners39。 Given this assumption, the theorist has concluded that the cost of capital to the owners of a firm is simply the rate of interest on bonds; and has derived the familiar proposition that the firm, acting rationally, will tend to push investmnent to the point where the marginal yield on physical assets is equal to the market rate of interest。 MILLER* What is the cost of capital to a firm in a world in which funds are used to acquire assets whose yields are uncertain; and in which capital can be obtained by many different media, ranging from pure debt instruments , representing moneyfixed claims, to pure equity issues, giving holders only the right to a prorata share in the uncertain venture。 ? This question has vexed at least three classes of economists: (1) the corporation finance specialist concerned with the techniques of financing firms so as to ensure their survival and growth; (2) the managerial economist concerned with capital budgeting; and (3) the economic theorist concerned with explaining investment behavior at both the micro and macro levels。 This proposition can be shown to follow from either of two criteria of rational decisionmaking which are equivalent under certainty, namely (1) the maximization of profits and (2) the maximization of market value。 equity, i。 Note that, under either formulation, the cost of capital is equal to the rate of interest on bonds, regardless of whether the funds are acquired through debt instruments or through new issues of mon stock。 Investment decisions are then supposed to be based on a parison of this risk adjusted or certainty equivalent yield with the market rate of interest。 Yet few would maintain that this approximation is adequate。 In the process they have found their interests and endeavors merging with those of the finance specialist and the managerial economist who have lived with the problem longer and more intimately。 In fact, the profit maximization criterion is no longer even well defined。 For decisions which affect the expected value will also tend to affect the dispersion and other characteristics of the distribution of outes。 The utility approach undoubtedly represents an advance over the certainty or certaintyequivalent approach。 Under this approach any investment project and its conitant financing plan must pass only the following test: Will the project, as financed, raise the market value of the firm39。s decision。 Our procedure will be to develop in Section I the basic theory itself and to give some brief account of its empirical relevance。 We have chosen to focus at this level rather than on the economy as a whole because it is at the level of the firm and the industry that the interests of the various specialists concerned with the costofcapital problem e most closely together。 The Capitalization Rate for Uncertain Streams As a starting point, consider an economy in which all physical assets are owned by corporations。 We shall refer to the average value over time of the stream accruing to a given share as the return of that share; and to the mathematical expectation of this average as the expected return of the share。 As will bee clear later, as long as management is presumed to be acting in the best interests of the stockholders, retained earnings can be regarded as equivalent to a fully subscribed, preemptive issue of mon stock。 It can be shown, furthermore, that whether the elements of a stream are sure or uncertain, the effect of variability per se on the valuation of the stream is at best a secondorder one which can safely be neglected for our purposes (and indeed most others too)。 Accordingly, if we adjust for the difference in scale, by taking the ratio of the return to the expected return, the probability distribution of that ratio is identical for all shares in the class。 To plete this analogy with Marshallian price theory, we shall assume in the analysis to follow that the shares concerned are traded in perfect markets under conditions of atomistic petition。 Let us denote this factor of proportionality for any class, say the kth class, by l/Pk。s worth of expected return in the class k。 Because firms may have different proportions of debt in their capital structure, shares of differe