Discount rate method in Yi Jing

Abstract

Discount rate method is a tool for asset pricing in the theories of investment and corporate finance, using discount rate to exchange from the future cashflows to the present value, but some limitation of this method could not exchange capital cost (WACC) for capital charges ($WACC) exactly at each time. The aim of this paper is to exploit an exchange tool based on a consequent of inflows (yang) and outflows (yin) relevant to an ancient graphic of He Tu in Yi Jing, to repair some limitation of discount rate method for paying stakeholders' capital charges. The methodology of yin-yang consequent in Yi Jing is a new approach in finance to support a financial plan in investment projects, including banks' debts (D) with interest rate (Rd) exchanged for cash interests ($Rd), and shareholders' equity (E) with equity cost (Re) exchanged for dividends ($Re) in whole process of investment operating on their capital budgeting. A contribution of yin-yang consequent in Yi Jing to the theories of investment and corporate finance gives some provision of minimum cash to control liquidity risk for payment of capital charges higher than the provision of minimum cash in management of investment project. So, the methodology of exchanges from capital cost to capital charges makes a premise for value-based asset pricing.