The definition of Discount Cash Flow is uses of future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. The Discount Cash Flow shows that changes in long-term growth rates have the greatest impact on share valuation. The interest rate changes also make a big difference. . The Discount Cash Flow analysis is more flexible than any other individual ratio it also allows the investor the opportunity to look at the ability of the company to grow.

The Capital Asset Model is an economic model for valuing stocks, bonds, and other assets and relating the risk with the expected return. The Capital Asset Model is based on the premise of the investor will demand risk premium which is simply what they expect to get back, for the additional risk taken. The Capital Asset Model uses a system that divides the portfolio's risk into systematic and specific risk. Systematic risk is the risk of holding the market portfolio. As the market moves, each individual asset is more or less affected. Specific risk is the risk which is unique to an individual asset. It represents the asset returns with general market moves.

References:
www.encycogov.com

Valued based management. net

Chapter 11 - Block, Hirt. (2005). Foundations of financial management (11th ed.). New York: McGraw-Hill.

...Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment while at the same time setting a specific rate of return with respect to the amount of the risk of a portfolio or an individual investment. The CAPM method takes into consideration the factor of time and does not get wrapped up over by the systematic risk factors, which are rarely controlled. In this research paper, I will look at the implications of CAPM in the light of the recent development. I will start by attempting to explain and discuss the various assumptions of the CAPM. Secondly, I will discuss the main theories and moreover, the whole debate that is surrounding this area more specifically through the various critics of the CAPM assumptions.
When Sharpe (1964) and Lintner (1965) proposed CAPM, it was majorly seen as the leading tool in measuring and determining whether an investment will yield negative or positive return. The model attempts to expound the relationship between expected reward/return and the investment risk of very risky...

...CAPMCAPM provides a framework for measuring the systematic risk of an individual security and relate it to the systematic risk of a well-diversified portfolio. The risk of individual securities is measured by β (beta). Thus, the equation for security market line (SML) is:
E(Rj) = Rf + [E(Rm) – Rf] βj
(Equation 1)
Where E(Rj) is the expected return on security j, Rf the risk-free rate of interest, Rm the expected return on the market portfolio and βj the undiversifiable risk of security j. βj can be measured as follows:
βj = Cov (Rj, Rm)
Var (Rm)
= σj σm Cor jm
σ2 m
= σj Cor jm
σm
(Equation 2)
In terms of Equation 2, the undiversifiable (systematic) risk (βj) of a security is the product of its standard deviation (σj) and its correlation with the market portfolio divided by the market portfolio’s standard deviation. It can be noted that if a security is perfectly positively correlated with the market portfolio, then CML totally coincides with SML.
Equation 1 shows that the expected rate of return on a security is equal to a risk-free rate plus the risk-premium. The risk-premium equals to the difference between the expected market return and the risk-free rate multiplied by the security’s beta. The risk premium varies directly with systematic risk measured by beta.
The figure above illustrates the security market line. For a given amount of systematic risk (β), SML shows the...

...Capital asset pricing model (CAPM)
Using the Capital Asset Pricing Model, we need to keep three things in mind. 1 there is a basic reward for waiting, the risk free rate. 2 the greater the risk, the greater the expected reward. 3 there is a consisted trade off between risk and reward.
In finance, It is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas - a model that calculates the expected return of an asset based on its beta and expected market returns.)
Using the CAPM model and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17%=(3%+2(10%-3%)).
Risk of a Portfolio
We all know that investments have risk, so it’s safe to assume that all stocks have risk as well? But did you know that there are different types of risk as well?...

...4 Year University vs. Community College
While many times it is not about the grades and getting into college, it is all about the other aspects including money issues, the consideration of maturity and independence and whether or not a major has been determined and selected. Community College and four year Universities are both excellent choices and have their own distinct merits, but are meant for vastly different people. If a person has a pre-determined career path in mind such as a doctor, then they should pursue a medical program in a four year University. Yet, if someone is not prepared to leave home or has absolute goals in mind, then Community College would be a much better choice for that particular individual. The education that Community College provides varies greatly from that of a four year university. While many people believe that University is the better choice, Community Colleges tend to have fewer students per class, which means closer relationships and more student/teacher interaction. This is a benefit for those students who appreciate access to their instructors so they can ask questions and avoid getting lost in the 'mix'. Fewer student to teacher ratio means more one on one time with student and teacher, which enhances student learning. It additionally means more recognition per student and individual teaching. At Universities there is much less one on one time. Classrooms and lecture halls are filled to capacity with hundreds of students per one...

...Is CAPM Beta Dead or Alive? Depends on How you Measure It
Jiri Novak*
* Uppsala University, Sweden E-mail: jiri.novak@fek.uu.se October 2007 Abstract: The CAPM beta is arguably the most common risk factor used in estimating expected stock returns. Despite of its popularity several past studies documented weak (if any) association between CAPM beta and realized stock returns, which led several researchers to proclaim beta “dead”. This paper shows that the explanatory power of CAPM beta is highly dependent on the way it is estimated. While the conventional beta proxy is indeed largely unrelated to realized stock returns (in fact the relationship is slightly negative), using forward looking beta and eliminating unrealistic assumptions about expected market returns turns it (highly) significant. In addition, this study shows that complementary empirical factors – size and ratio of book-to-market value of equity – that are sometimes presented as potential remedies to beta’s deficiencies do not seem to outperform beta. This suggests they are not good risk proxies on the Swedish stock market, which casts doubt on the universal applicability of the 3-factor model. Keywords: asset pricing, CAPM, beta, factor pricing models, 3-factor model, market efficiency, Sweden, Scandinavia JEL classification: G12, G14 Acknowledgements: I would like to thank Dalibor Petr, Tomas ... and Johan Lyhagen for their help with...

...The purpose of DCF-Valuation is to determine the value of a company in terms of its future cash flows. The cash flows are adjusted with certain items (e.g. those not related to company´s core businesses or those with no cash effect) in order to make sure the flows reflect the actually generated cash as good as possible.
This document describes DCF valuation in detail and in our valuation model. If you would like to get an overview of valuation in general or practical examples (numerical and graphical) about it, then you should look at our valuation tutorial. It approaches equity valuation first with EVA instead of DCF but as the tutorial reveals EVA approach is only an another name for the old familiar DCF valuation. Both end up to identical end result i.e. identical equity valuation.
The underlying idea of DCF-Valuation is to compute the fair value of a company i.e. the intrinsinc value of the company´s share. The potential of the share price (which the investors are particularly interested in) is then computed by comparing the fair value with the current market price of the company´s share.
The basic formulation of Discounted cash flow valuation is as follows:
• Free cash flow to firm is discounted with WACC to the Year 0 (the forecast year) in order to get the present value of free cash flows.
• Cumulative discounted free cash flow is a yearly item in which all the forecast years´...

...CAPM
1 Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.
2 Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12.
3 Calculate the expected return for C Inc. which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.
4 Calculate the expected return for D Industries which has a beta of 1.0 when the risk free rate is 0.03 and you expect the market return to be 0.13.
5 Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.
6 Calculate the expected return for F Inc. which has a beta of 1.3 when the risk free rate is 0.06 and you expect the market return to be 0.125.
USE THE FOLLOWING INFORMATION FOR THE NEXT FIVE PROBLEMS
Rates of Return
Year RA Computer Market Index
1 13 17
2 9 15
3 -11 6
4 10 8
5 11 10
6 6 12
7 Compute the beta for RA Computer using the historic returns presented above.
8 Compute the correlation coefficient between RA Computer and the Market Index.
9 Compute the intercept of the characteristic line for RA Computer.
10 The equation of the characteristic line for RA is
11 If you expected return on the Market Index to be 12%, what would you expect the return on RA Computer to be?
USE THE...

...the systematic variance as diversification increases, which means diversifying across industries offer benefit over diversifying within a given industry. Second, using the figures estimated to testify that the CAPM works in practice.
The capital asset pricing model (CAPM) provides us with an insight into the relationship between the risk of an asset and its expected return. This relationship serves two significant functions. First, it provides a benchmark rate of return for evaluating possible investments. Second, the model helps us to make an educated guess as to the expected return on asset that have not yet been traded in the marketplace. Although the CAPM is widely used because of the insight it offers, it does not fully withstand empirical tests. CAPM is a one-period model that treats a security’s beta as a constant, but beta can be changed in respond to firms investment in new industry, change in capital structure and so on. If betas change over time, simple historical estimates of beta are not likely to be accurate. Mismeasuring of betas will not reflect stocks’ systematic risk, so in this case the CAPM does not compute the risk premium correctly. Furthermore, the systematic risk, the source of risk premiums, cannot be confined to a single factor. While the CAPM derived from a single-index market cannot provide any insight on this.
The data we used provides us with 5-year period...

1280 Words |
5 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":33282964,"categoryName":"Fiction","categoryParentId":"17","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":1,"pageRange":"1-1","totalPages":1}},"access":"premium","title":"Comparision and Contrast of Dcf and Capm","additionalIds":[3,52,7,58],"additional":["Business \u0026 Economy","Business \u0026 Economy\/Organizations","Education","Business \u0026 Economy\/Industries"],"loadedPages":{"html":[],"text":[1]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Comparision-And-Contrast-Of-Dcf-And-176372.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"}}