Risk Classes And The Required Rate Of Return On The Common Stock Of A Firm.

Author

Robert Lee Cheek

Publication Date

6-3-1968

Abstract

This paper proposes a method of examining the assump­tion that there are homogeneous risk classes of firms which will have the same required rate of return on the common stock, the risk classes being defined as those firms whose expected average income is subject to the same degree of uncertainty. This assumption, proposed by Franco Modigliani and Merton H. Miller in their famous work on the cost of capital to a firm, has tended to be neglected in the empirical studies, and in particular the tests of Alexander Barges, which have been made during the recent years. The method proposed will separate firms belonging to a given industry into two risk classes on the basis of the un­certainty of the expected earnings. The hypothesis that there will be a significant difference in the required rate of return is submitted to statistical tests and the results of the tests are then examined.

Further tests are made on the relation leverage has on the required rate of return by common stockholders and some of the assumptions underlying Modigliani-Miller's proposition of the required rate of return and leverage.

Language

English

Document Type

Thesis

Degree Name

Master of Business Administration (MBA)

Level of Degree

Masters

Department Name

Anderson School of Management

First Committee Member

James E. Brown

Second Committee Member

Everett G. Dillman

Third Committee Member

Illegible

Recommended Citation

Cheek, Robert Lee. "Risk Classes And The Required Rate Of Return On The Common Stock Of A Firm.." (1968). https://digitalrepository.unm.edu/anderson_etds/40