. Suppose you want to use the CAPM model to estimate the discount rate of a company in order to discount its cash flows b...
. Suppose you want to use the CAPM model to estimate the discount rate of a company in order to discount its cash flows but that company does not trade in the stock market. What would be the problem in using the CAPM, What would you do in order to solve the problem?
Homework Answers
Capital Asset pricing model:
As per CAPM model:
Re= Rf+(Rm-Rf)B
Re= required rate of return.
Rf= Risk-free rate.
Rm =Market Risk Premium.
B = Beta, systematic risk.
The slope of the regression line is called Beta. The regression
line between stock return and market returns.
Beta that is systematic risk is determined by: Rate of change of stock return to the rate of change of market return. It is the sensitivity of stock return to Market return.
Since a private company is not publicly traded it is difficult to calculate its Beta. The problem for private companies calculation of Beta.
However, we can resolve the issue by considering and using the Beta From Comparable Public Companies which will act as a proxy.
Add Answer to:
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premium that is three times the market risk premium, what should
you do?
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assumptions still hold. If you would like to earn a risk
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now? Briefly explain using the graph
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