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Essay / Research Paper Abstract
This 5-page paper discusses three rate of return calculation models -- CAPM, APT and dividend growth, and determines which is the best for Amazon to measure rate of return. Bibliography lists 4 sources.
Page Count:
5 pages (~225 words per page)
File: D0_MTamazacct.rtf
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Unformatted sample text from the term paper:
return. By the same token, the bad news is that there are a variety of methods by which a corporate rate of return can be estimated. It doesnt take a
whole lot to throw estimations off, especially when it comes to estimating rates of return. Ive been asked, by the Amazon board
of directors, which of the three most typically used models, dividend growth, CAPM or APT, is the best one, and most accurate, for estimating required rate of return. Given the
positives and negatives of each model, its my belief that dividend growth is the best model for estimating Amazons required rate of return.
Lets examine each of these models, then Ill explain my decision. The Capital Asset Pricing Model, or CAPM, determines
the relationship between risk and expected returns; typically CAPM is used when it comes to pricing fairly risky securities (Investopedia, 2008). CAPM points out that the expected return of an
investment; whether it be a security or an entire portfolio, equals the rate on a risk-free security, plus a premium for risk-taking (Investopedia, 2008).
When it comes to such securities, the theory behind CAPM is that investors should be compensated both for the time value of their money and risk (Investopedia,
2008). In a CAPM model, one part of the formula represents time - and rewards investors for putting the money in the investment over a specified period of time (Investopedia,
2008). The other part of the formula takes into consideration the amount of compensation the investor deserves for tying his/her money into the risky investment (Investopedia, 2008). If, when plugging
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