6.5 CAPM for valuation

Question 1

CAPM can deliver a value for the correct discount rate for risky cashflows:
* The CAPM tells us the …

• An asset delivers (ultimately) cash flows
• Thus, the CAPM can be used to find a correct discount rate for … if
  we know the beta of this asset
• As cash flows are typically risky, we have to use …
• Companies will usually be financed by equity as well as bonds, then we have to
  use the so called WACC (Weighted Average Capital Costs) for discounting
  – WACC = weighted average of equity costs and debt costs
• The CAPM can tell us something about the equity portion
• However: Empirical tests have to tell us whether such a use of the model CAPM is warranted

Answer 1

required rate of return for a risky asset, depending on its beta risk

risky cash flows

risk-adjusted discount rates

Question 2

jensen’s alpha

Answer 2

see slide 31.