Corporate Finance Summative Paper Using Capital Asset Pricing Model and The weighted Average Cost of Capital
There are various methods that can be used in estimating the the returns of assets. Most of these asset projection techniques are covered in financial time series analysis. The return of the assets can be estimated with the aid of the Capital Asset Pricing Model (CAPM), according to which: the return on the asset = risk free rate + beta x (expected return on the market risk free rate)
Description of ‘Capital Asset Pricing Model -CAPM’
CAPM is a primary tool that can be used to tackle assignments that seek to investigate the relationship between risk and expected returns.
A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted.
Where: Re = cost of equity Rd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate
Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula:
NPV = Present Value (PV) of the Cash Flows discounted at WACC.