Capital Asset Pricing Model Essay Example | Topics and Well Written Essays - 1750 words

Capital Asset Pricing Model - Essay ExampleThis feign has been heavily criticised and debated over the past decades, and many of the economists are of the opinion that this framework is not adequate enough to assess various insecurity factors comprehensively. However, none of the opponents could produce a potential alternative to this concept till date. This paper will critically analyse the applicability of the CAPM in corporate finance applications in the stage setting of modern business environment. Corporate applications of CAPM Hillier et al (2008, section 5.1) provide a detailed view of the corporate applications of the capital asset pricing role model. Through a well integrated theoretical concept and empirical evidences the authors give readers an easy perceptiveness of the applicability of CAPM in corporate finance. Through this section, the authors address the misconception that the CAPM theory is relevant only to investment purposes. The application of capital asset pricing model together with mean variance analysis is greatly supporting corporate managers in decision making process today (Grinblatt & Titman 2003, p. 132). The author argues that a manger is most likely to lose his job if his organisation is continuously struggling with declining spud prices (ibid). Hence every corporate manger is forced to improve the firms stock prices at any cost. For this, the manager needs clear understanding of the different elements that determine share pry. Such knowledge would greatly assist corporate managers to determine what actions would improve the stock value and thereby serve the beguile of stockholders and directors. For instance, the combined application of CAPM and mean variance analysis may help firms to hedge their lay on the line elements to a great extent and diversify their portfolios of real investment projects (Grinblatt & Titman 2003). The CAPM model also benefits multinational corporations to scrutinise their capital usance deci sions. Management theories and historical evidences clearly indicate that thoughtless capital expenditures would lead to corporate failures. contribute executives are extremely concerned with the firms capital expenditure strategies as they determine the organisations levels of sustainability. At this juncture, CAPM assists regulators to frame their capital expenditure strategies by focusing on various factors affecting capital expenditure. This concept is also useful for financial managers to arrive at reasonable conclusions on how to value real assets. Although many of the critics claim that CAPM model cannot be used for valuing real assets, majority of corporations are still cantered on this model. However, scholars like Lee et al (2009) strongly believe that CAPM can be very useful in real asset valuation. While analysing the historical growth phases of CAPM, it seems that corporate managements have been using this model in their all areas of financial analysis and planning si nce the development of this concept. Scholars opine that capital budgeting is one of the major corporate applications of the CAPM. If it is possible to predict the systematic risk associated with a project accurately, then the CAPM can be applied to compute the risk adjusted discount rate which is essential to compensate the organisation for the risk elements of the project.