Capital Valuation Paper

Topics: Capital asset pricing model, Investment, Net present value Pages: 3 (885 words) Published: November 17, 2010
Capital Valuation Paper
Team A
Blake Reimert, Crystal Harris
Raquel Young, and Tambra Williams
FIN/419
Thomas Mitchell
University of Phoenix
November 11, 2010

Capital Valuation Paper
Valuation is the process of estimating the potential market value of an asset or a liability. Valuations can be done on assets, such as investments in securities like stocks, options, or business enterprises. Valuations can also be done on intangible assets such as patents or trademarks or on liabilities; for example bonds. Valuations are required in many capacities. For example, investment analysis, capital budgeting, mergers and acquisitions, and tax liabilities. Team A will discuss the Capital Asset Pricing Model (CAPM) and the Common Stock Model (CSM); including the Discounted Cash Flow (DCF), the Dividend Discount Model (DDM), and the Earning Growth Model (EG) in relation to Wal-Mart, Inc. Team A will also justify the current market price of Wal-Mart’s debt and equity, using the CAPM and show calculations that support the findings, including rates of return. Team A will also defend the CAPM as it best supports the team’s findings. Valuation Models:

The Capital Asset Pricing Model (CAPM) is a simple tool to manage pricing model. The method is effortless and rapidly determined, which is in-depth adequately to approximate a security price, or required return. The equation is R = RF + Beta x (RM - RF); the essential principle of the CAPM is the mandatory return on a portfolio or security equals the risk free rate plus a risk premium. The risk free rate is usually low and estimated by using the one-year Treasury bill rate, which the market rate estimation is determining the expected return on the S and P500 index (SPX). The next calculation is the beta, or the probability of the investment. A beta of 1.0 equals the risk of the market whereas greater than one is more risky than the market. For instance, a beta of 1.2 would be 20% more risky than the...
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