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Essay / Research Paper Abstract
This 4 page paper looks at a case presented by the student where the weighted average cost of capital needs to be calculated using the CAPM, the company assessed as an investment and then valued with different methods.
Page Count:
4 pages (~225 words per page)
File: TS14_TEkobese.rtf
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Unformatted sample text from the term paper:
use the Capital Asset Pricing Model (CAPM). CAPM is a model that describes, through equilibrium the way that assets and derivatives are priced. The conclusion of the model determines that
the rate of return for any asset will be the risk free return plus a premium that is based on the assets non diversifiable risk, today this is known as
the beta, which is then multiplied by the markets risk premium. The equation is therefore the expected security return = risk free return + beta x (expected market risk premium)
(Bernstein, 1993). There are a few problems with this theory, firstly it there are the assumptions made which maybe wrong; these are
that there are no costs involved in the transactions such as taxes, stamp duties or sales costs, that all investors will have the same investment profiles, expecting the same
returns and performance on risky investments and that all investors maintain the same investment horizons it also does not take into consideration specific stock variation and conditions (Price, 1998). There
is also another anomaly with the CAPM, this is that although stock prices should not reflect in the beta they do. However, we can use the model to look a
the way in which the WACC will be calculated for Kobese Holding. Using this with the assumption of a risk free rate of 4% and a market rate of 9%
and the beta of 1.5 this results in a WACC 11.50%. Question 2 If we are looking at this as an investment there are several tools we can use.
We can start by looking at what the investment would be worth using the projected cash flows and then considering the net present value of those cash flows discounted using
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