Rejoinder: Regulation and the Term of the Risk Free Rate: Implications of Corporate Debt
Accounting Research Journal, Vol. 20, No. 2, pp. 87-88, 2007
Posted: 12 Jan 2010
Date Written: January 11, 2010
Abstract
Hall (2007) challenges a fundamental point in the analysis of Lally (2007) and earlier papers: if the risk free rate within the allowed rate of return matches the regulatory term, then the present value of future cash flows PV0 equals equity holders initial investment C(1-L). Hall argues that this result implicitly assumes that forward rates equal expected spot rates. If this were true, it would undercut Lally’s analysis because the empirical evidence does not support the alleged assumption.
Keywords: Lally, Risk Free rate, Regulatory term, Present Value
JEL Classification: H63, G32, G38
Suggested Citation: Suggested Citation