Factor Analysis in Corporate Finance

Topics: Capital asset, Bond, Capital gain Pages: 2 (484 words) Published: January 6, 2013
In this chapter we will study that how more than one factor which is associated with expected return, are evaluated on capital asset pricing model. We have described earlier that beta specifies the inclination level or slope of characteristic line and this is denoted by βj. Extended capital asset pricing model evaluates many factors other than beta, to calculate the expected return of a security. We can add or include some other factors to the equation of expected return of a security, to gain more information about expected returns and the effects of certain financial institutions on securities. An investor can get two type f returns on his security. First one is called the dividend. It is the amount of money that a company gives to its shareholders, from its profits. Dividend can be received even before the security reaches at maturity level. It can be received during holding period of that security but it is taxable also. Second one is called capital gain or capital loss that occurs only when a stock is sold. Capital gain is the profit that an investor gets on his investment in capital assets. Capital asset pricing model will normally generate similar results, when no taxes are being paid by the investor or the results will remain unaffected. In many countries, dividends are charged with more taxes compared to capital gains. Systematic bias effect is that investors have to pay higher tax on their stocks that yield high dividend and same is with the stocks that yield low return in order to counteract the effect of taxes. If systematic bias exists in the market then the expected return will depend on two things first is beta and second one is dividend yield .In such situation it would be a better choice to plot a three dimensional security market Surface. Expected return is on X-axis of three dimensional security market Surface and beta nd dividend yield are on other two axes. This surface shows that higher beta and higher dividend can ultimately leads to higher...
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