Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Capital Asset Pricing Model - Research Paper Example

Comments (0) Cite this document
 The purpose of the paper “Capital Asset Pricing Model” is to understand the cost of equity of a given company. The cost of equity is associated with risk associated in investing in that company. Higher the risk associated in equity investment, higher will be the cost of equity for shareholders…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER95.7% of users find it useful
Capital Asset Pricing Model
Read TextPreview

Extract of sample "Capital Asset Pricing Model"

Download file to see previous pages The average cost of capital in the S&P 500 is 10.2 percent. It can be said that the cost of capital of Nvidia is almost on par with S&P 500 companies. It is pertinent to note that risk free rate varies time to time depending upon the yield of government Treasury bill. Usually, it is found to give 3% in normal conditions and based on this treasury rate, the cost of equity can also be calculated using the same formula
Rj = RF + βj [RM - RF]
It is assumed that difference between the expectation on rate of return for market portfolio and available risk-free rate of return, [RM - RF] factor is 7.0
Then, Rj, the cost of equity = 3+ 1.54 [7]
                                            = 13.78
Based on this, the cost of capital of Nvidia is certainly higher than average cost of S&P 500 companies.
Answer 3.
The cost of equity of Chevron (CVX) can be calculated in the similar fashion.
Beta of Chevron is 0.70 (Key Statistics 2)
The cost of equity = 3+ 0.7 [7]   (Assuming risk free return of 3%)
                              = 7.9The cost of equity is remarkably low in case of Chevron compared to the average cost of S&P 500 companies.
It would be further interesting to find the cost of equity whose beta is 1.76 Wipro Ltd. (in NASDAQ known as WIP)
The cost of equity of Wipro = 3 + 1.76 [7]   (Key Statistics 3)
                                             = 15.32Thus, Wipro has higher cost of equity than Nvidia and Nvidia’s cost of equity is higher than Chevron. With rising beta the cost of equity also goes up. It can be described as a stock valuation model that takes into consideration dividends and their growth, discounted to present value....
in NASDAQ known as WIP) The cost of equity of Wipro = 3 + 1.76 [7] (Key Statistics 3) = 15.32 Thus, Wipro has higher cost of equity than Nvidia and Nvidia’s cost of equity is higher than Chevron. With rising beta the cost of equity also goes up. Answer 4. Dividend Growth Model It can be described as a stock valuation model that takes into consideration dividends and their growth, discounted to present value. Under this model, the valuation depends on 1. The Current Dividend 2. The Growth of Dividend at constant rate 3. Required Rate of Return For more clarity, it will be worthwhile to have some real life situation. The company is paying dividend of $2 per year and it is growing at the constant average rate of 3% per year. The only variable component in this model is required rate of return, if it is assumed as 15% Then, value under this model can be given as, Value= Current Dividend / (Required Return - Dividend Growth) (Gordon Growth…2011) = 2 / (0.15 – 0.03) = 2 / 0.12 = 16.66 Above calculation tells that under the given assumptions, this stock at the price of $16.66 should yield average annual 15% rate of return. At this juncture, it will also be prudent to look at the required rate of return and its basis. The required rate or return is given as the risk free return (such as U.S Treasury bill gives) adding to the return required for taking the risk in investing the stock. Thus, required rate (RR) is given as RR = risk free return + ? (RM-RF) = 3+ 1.7 (10-3) {Beta for the industry under calculation is 1.70} = 15 That is how required rate of return was assumed as 15% (Dividend Growth…) Arbitrage Pricing Theory – APT This theory was propounded by Stephen Ross in 1976. This theory has more flexible assumptions to describe as and taken as an alternative to ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Capital Asset Pricing Model Research Paper Example | Topics and Well Written Essays - 1250 words”, n.d.)
Retrieved from
(Capital Asset Pricing Model Research Paper Example | Topics and Well Written Essays - 1250 Words)
“Capital Asset Pricing Model Research Paper Example | Topics and Well Written Essays - 1250 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Capital Asset Pricing Model

Optimal Capital Structure

One of the recent concepts applied in financial management is the effective utilization of resources and choosing the optimal and most appropriate capital structure. In a resource constraint situation, the importance of financial management is especially highlighted as financial strategies are required to get the company or organization pass through several constraints that it may confront in the day to day functioning. The reasons leading to these sources constraint situations could be lack of demand, scarcity of raw materials, labor problems, liquidity control, lack of technological awareness, prejudiced policies about management and finance, etc. If the problem is not taken into consideration during the initial stage itself, th...
6 Pages(1500 words)Coursework

Lockheed Martin as a Model for Ethics in an Organization

Lockheed Martin (LM) had been focusing on petty issues like how to respond to a chain letter from the supervisor or how to deal with an employee who steals his child’s school supplies from the company (Guenther, 2000). They did not allow whistle blowing and there no ethical codes of conduct laid down. In 1997 McDonnell Douglas hired an engineer away from LM who carried with him all proprietary documents. Later that year McDonnell Douglas merged with Boeing, rivals to LM and in 2005 LM and Boeing decided to merge their space-rocket business and came into agreement to drop their litigation over the stolen rocket-contract information (Gates & Mundy, 2006). They could be barred from defense contracts and denied export licens...
6 Pages(1500 words)Term Paper

The Major Issues in the Debate Regarding the Existence of an Optimal Capital Structure

The level of capital has been used as a criterion for the classification of a company within its market. Regarding this issue it is noticed by Penrose (1952, 810 in Cooper, 1997, 750) that ‘positive profits can be treated as the criterion of natural selection -- the firms that make profits are selected or 'adopted' by the environment, others are rejected and disappear’On the other hand, Ruhnka (1985, 45) supported that ‘the primary source of capital for most start-up and development stage companies is equity capital raised through limited stock offerings that are exempt from expensive federal and state registration requirements’. In other words, the capital of the firm can be formulated through a series of...
13 Pages(3250 words)Term Paper

Money & Capital Markets

The subprime lending crisis rocked the U.S. economy in late 2006 and early 2007. Subprime lending refers to the loans which are provided to the borrowers having less than ideal credit histories. In other words, subprime lending is provided to persons who do not qualify for conventional credits or loans.

The subprime loans gave rise to inflated credit facilities, increased availability of infrastructure and more circulation of more currency in the economy. But this system also gave rise to unprecedented meltdown, liquidation of funds and resultant heavy losses of financial institutions due to non-payment of loans by the borrowers.

The main reasons for the crisis are more than one. They are the failure of the b...
10 Pages(2500 words)Assignment

HR Model That Can Measure if It Adds Value

There has been a change of approach in the way that labor is reviewed in the organization and the modern perception emphasizes viewing labor as an investment and not as a commodity or resources. In this regard, labors have started to be seen as a made of creative and innovative social being who is able to give the organization a competitive edge. (Michael 2006, p. 42)
The term human resource has been changing to broader management and the concept of human capital has been applied more often in place of human resources. Therefore the modern perception of human labor has been changing the way organization have been handling their human capital to a more liberalized way. It has been realized that having a competitive workforce c...
13 Pages(3250 words)Assignment

Human Resource As Proactive Human Capital: World Bank

Since employees are the pillar of the organization, the role of human resource management becomes crucial in the employment of its workforce. In the emerging challenges of the changing business equations, when the labor deployment is undergoing quantitative and qualitative transformations, HR strategy needs to be redefined to create versatility and flexibility of the contemporary work environment.

Access to information is a vital part of organizational management processes as it not only promotes efficiency and knowledge-based discharge of duties by the employees but it a great tool for the management to exploit the available information to improve its performance. The information provides wide-ranging knowledge about t...
12 Pages(3000 words)Case Study

Project Planning Human Capital

Project planning involves a lot of factors and areas that we need to address for the effective management and handling of the project. The aim of this report is to provide a deep insight into some of the main areas that we need to address for the project of Adams's family farmhouse renovation. These issues are project team communication, project risk management, and deadline handling. Effective communication in a project provides a huge advantage regarding the better working and handling of the project. I have selected a very significant project regarding the preservation of the old and historical places. Here we require effective communication to provide better interaction among the designer, developers, and history preservation...
8 Pages(2000 words)Coursework

Capital Asset Pricing Model and Recent Developments

It is the most essential aspect of any venture. The important considerations that finance has within it, is that of profit and loss. The business as a whole or a person as an individual always strives to earn a profit. To earn a profit, one has to undertake uncertainties that are known as risks. Therefore, profit is also known as the reward for incurring risks.
In the present world of today, the capital market has come up as a viable investment opportunity for individuals all across the globe. People invest their hard money only with the expectation to earn profit or return. The stocks of various companies that are traded in the capital market are also known as capital assets. Prior to investing in any of the stock or capital...
7 Pages(1750 words)Assignment

Global Employee Information and Consultation: Replicating the European Model

...Global Employee Information and Consultation: Replicating the European Model INTRODUCTION The only way for the employees and their representatives to reach the level of multinational corporations is to create an effective transnational mechanism that facilitates consultation and information disclosure. The European model (EWC) is an example of an institution that intends to provide employees voice in the transnational arena. The information dissemination and consultation arrangement enable employee representatives to participate in discussing issues that pertains to their employment. However, there is a need to analyze whether EU style of legislating a mechanism shall be effective if replicated globally. The answer in part depends...
9 Pages(2250 words)Coursework

Capital Punishment as Deterrence to Homicide

Counter research argues that different research techniques give different results. Murder trials in the United States cost millions of dollars. There has been the pressure that this cost should result in a deterrent effect on potential criminals. The deterrence theory argues that criminals weight the cost and the benefits of any criminal venture.
Although deemed a controversial topic by many, the use of capital punishment, or in other words, the death sentence, is a widely used method of punishing convicts in homicidal crimes. The use of the death sentence has the notoriety of being an inhumane and barbaric form of justice. On the other hand, many believe that it is the consequence that is rightfully deserved to people who co...
9 Pages(2250 words)Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Research Paper on topic Capital Asset Pricing Model for FREE!

Contact Us