As the cost of capital of the portfolio is the weighted average of the opportunity cost of capital of the venture and the market.
It is based on the application of CAPM to determine well-diversified investors' opportunity cost of capital, such as limited partners of VC firms (LP), and recognizing that under diversified entrepreneurs have higher significant cost of capital than the required rates of well-diversified investors.
We assume that if (and only if) the dividend payments fall short of the opportunity cost of capital, the shareholders remove the entrepreneur from the corporation or, equivalently, liquidate the project.
Note that this outcome fulfills the investor's continuation constraint by exceeding the opportunity cost of capital.
Table 1 Outside Equity Constraints Legal form Outside equity constraint Limited partnership w/K > r/1+r Private corporation w/K [greater than or equal to] r-k/2/1+r Public corporation w/K > r/1+r w Enterpreneur's initial wealth K Expenses needed to purchase the operating assets r Marginal cost of capital k Project profitability (percentage by which the project return exceeds the opportunity cost of capital
In Equation (1), (I)i reflects the yearly opportunity cost of capital invested in a project with an infinite life.
When the industry settles into long-run competitive equilibrium, all projects are expected to just earn their opportunity cost of capital and their expected net present value will just be zero.
18), applies to each of them but the relationship between the WACC and the opportunity cost of capital [r.
Based on Miles and Ezzel (1980), Harris and Pringle's (1985) model supposes that all tax shield have the same risk as the firm's asset and should be discounted at the opportunity cost of capital.