Investigate different factors that influence the valuation of equity and in your report assume the CAPM is used to form the Weighted Average Cost of Capital (WACC).
Your assignment should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to the Academic Integrity Policy.
Write a five to seven page APA report not including title and reference pages answering the questions below. Do not just answer the questions, but use the questions to formulate your report. Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to University's Academic Integrity Policy.
Questions to be answered in your report:
Write a research report that outlines the topics -
- Determine how diversification is important in the formation of CAPM.
- Provide numerical illustrations for CAPM.
- Research the validity of CAPM.
The purpose of this assignment for the student is:
- Use information technology to complete academic writing and research.
- Present written information in a persuasive, organized, clear, and concise manner relying on research, data, and analytics.
- Use acceptable paragraph and sentence structure with minimum grammar, punctuation, and spelling errors; and demonstrate appropriate word choice, tone, and format.
- Explain and calculate the costs of different capital components—debt, preferred stock, retained earnings, and common stock.
- Explain why the weighted average cost of capital (WACC) is used in capital budgeting.
Requirements of the assignment:
- All papers must follow all APA requirements including an abstract. (10% deduction if not)
- All papers must have a reference page. The textbook is an acceptable source.
- Body of the paper 5 -7 pages, no more or less.
- Title page, abstract, and reference pages are required. However, they do not count towards any page count.
- Writing should reflect an understanding of the chapter’s basic concepts, thorough research, and logic and critical thinking skills.
- The introduction is attention getting with sufficient background information to establish the topic and a clear thesis statement.
- The conclusion summarizes the main points and leaves the reader with a strong comprehension of the paper’s significance and the author’s understanding.
- Grammatically correct - No spelling, grammar, or mechanics errors.
- Do not use the first person. (10% deduction if used)
Explanation & Answer
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Running Head: CAPM
Capital Asset Pricing Model
CAPITAL ASSET PRICING MODEL
This research provides a comprehensive view of the CAPM in the evaluation of WACC, the
report provides information on the different factors that influence the valuation techniques such
as CAPM and WARCH (Bente, 2016). This is followed by a deeper understanding of the
mechanism and theory through which the model works. There is also an analysis of the validity
of the paper from different perspectives this includes how the model differs from others through
scientific studies that were conducted. The paper finally analyses the different area of costs of
different capital components.
The CAPM –capital asset pricing model- is a calculation to determine the return rate of
an asset with a given risk. Suppose a stoke A has a higher risk than B the stock price of A would
have a higher value than that of B (Investopedia 2019). This is to serve as compensation for the
higher risk the investors will taking. Although there are different perspectives on the
effectiveness of the model. This article provides a deeper understanding of CAPM. With the
thesis is capital asset pricing model a valid strategy to determine the risk of a stock.
Factors that influence the valuation of equity
CAPM is a very important business valuation technique. The main focus of CAPM when
determining the cost of equity is the discrete earnings of a company and the finance and
operation valuing aspects. The following are the valuation factors. First is the track record of
business earnings. In comparison to the industrial average, if the value of earning are above those
of the industry and are stable the value of the company is higher. With a higher value of business
earnings record, a company is at a lesser risk of losing earnings, this usually implies a better
value of equity.
Secondly, are the predictions of industrial growth. If an industrial sector is experiencing
rapid growth then n industry in this sector has a higher value of equity. Some of the common
rapid growing industries include health, education, energy, and mining industries (Fin 2016).
CAPITAL ASSET PRICING MODEL
Due to this, the probability of a business earning falling is lower this leads to a business having a
beater net value.
Third is how easy the business can access funding. Constant funding is what keeps a
business running properly. The value of equity is affe...