Capital Asset Pricing and Discounted Cash Flow
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This paper compares and contrasts the capital asset pricing model (CAPM) and the discounted cash flow (DCF) model in valuing common stock. The paper holds that, because of the complexity and importance of valuing common stock, the above techniques have been devised over time to accomplish this task. It points out that CAPM focuses on inputs to calculate stock prices that are external to the firm while the DCF model focuses on internal factors. Also, CAPM is concerned with growth rate, while DCF is concerned with estimated returns. The paper concludes that both models are important to investors and expanding companies.
From the Paper:"For a firm that is expanding, it is difficult to establish a proper growth rate for the DCF. If past growth rates in earnings and dividends have been relatively stable, and if investors appear to be projecting a continuation of past trends, then the growth rate may be based on the firm's historic growth rate. However, if the company's past growth has been abnormally high or low, either because of its own unique situation or because of economic fluctuations, then the growth rate has to be estimated in some other manner."
Sample of Sources Used:
- Amihud, Y. and Mendelson, H. (September 1991). Liquidity, Maturity, and the Yields on U.S. Treasury Securities. The Journal of Finance, 46, 4, 1411-1425.
- Block, S. & Hirt, G. (2005). Foundations of financial management (11th ed.). New York: McGraw Hill Publishers.
Cite this Comparison Essay:
Capital Asset Pricing and Discounted Cash Flow (2008, June 04) Retrieved November 23, 2020, from https://www.academon.com/comparison-essay/capital-asset-pricing-and-discounted-cash-flow-104189/
"Capital Asset Pricing and Discounted Cash Flow" 04 June 2008. Web. 23 November. 2020. <https://www.academon.com/comparison-essay/capital-asset-pricing-and-discounted-cash-flow-104189/>