ABSTRACT
Myron Gordon has provided readers five propositions that he believes are essential for the theory of finance. Having argued that there is reasonable doubt as to the empirical validity of each, he then goes on to provide an outline of a theory of investment that differs from that of neoclassical theory. While I may agree that the propositions necessary for the now traditional theory of finance are not met in capital markets of record, I do not believe the neoclassical theory of investment is dependent on the truth or falsity of financial theory as described by Gordon (1992). The neoclassical theory of investment takes from financial theory one element, namely the cost of capital, or, alternatively, the demand price of capital. The theory of finance itself simply provides one set of assumptions that can provide a measure of that cost. If the assumptions do not hold true, then an alternative measure can be derived if, for a theory of investment, an explicit formulation of the actual cost of capital is needed. I believe that the agenda in the finance literature has been to explore alternative formulations rather than to defend the assumptions stated by Gordon as an adequate description of reality. 1
