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Essay / Research Paper Abstract
A 5 page paper comparing the Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC). There are other methods of determining best placement of capital for investment purposes. Though the CAPM has been widely used, its description and popularity arose at a time while globalization was gathering momentum but before it became the business word of the 1990s. In today's economic climate, it appears to be less reliable than in the past, and less reliable than other methods available. WACC provides better means for assessing relative risk of investment. Bibliography lists 7 sources. KS-CAPM.doc
Page Count:
5 pages (~225 words per page)
File: CC6_KS-CAPM.doc
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competitive, large and profitable organizations also have more money to invest than possibly at any other time. Making capital investments are not related to revenues resulting from business activity,
but can aid the organization in strategic planning and overall profitability if some of those investments prove to have been placed in the likes of companies such as Dell Computer
or the next highly successful biotech company. There are a wealth of investment avenues organizations can take, and in todays atmosphere of increasing
globalization, many of those opportunities lie in international markets. The Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC) have long been considerations for investment decisions,
but they have taken on new meaning in todays environment where there are so many opportunities available and frequently many very different accounting methods through which businesses report values.
Bottazzi, Hens and Loffler (1998) report that "The Walras Law and the Tobin Separation Property illustrate market demand in a Capital Asset Pricing Model
economy Homogeneity. With the presence of choice associated with normalized price systems and demands fulfilling Walras Law and the Tobin Separation Property" (p. 192), the authors noted the presence of
"variance-averse agents" leading them to conclude that Sonnenschein-Mantel-Debreu theorems related to market excess demand functions under general equilibrium models" (Bottazzi, Hens and Loffler, 1998; p. 192) is empirically supported.
Assumptions to be made with the CAPM frequently include that of the perfect market, in which there are many participants both buying and selling
a homogeneous product, perfect information and no barriers to entry for new participants. Such a perfect market may not be possible, but it is assumed that the more progress
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