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What is CAPM (Capital Assets Pricing Model) and how do companies make financial decisions based on...

What is CAPM (Capital Assets Pricing Model) and how do companies make financial decisions based on it?

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Answer #1

CAPM model is a method of calculating the required rate of Equity.
CAPM = Risk Free rate + Beta *(Market Return - Risk Free rate)

Companies use CAPM to calculate the required rate of Capital for calculation of the intrinsic value of firm, it is used in capital budgeting regarding selecting or rejecting any project.

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