M7hat 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 money-fixed claims, to pure equity issues, giving
holders only the right to a pro-rata share in the uncertain venture?
This cluestion 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 managerid
econoniist concerned with capital budgeting; and (3) the economic
theorist concerned with explaining investment behavior at both the
micro and macro 1evels.l