Capital Asset Pricing And Discounted Price Flow Models Essay

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Capital Asset Pricing and Discounted Price Flow Models

Knowing the risk of an investment and understanding how that risk will affect any future returns are crucial aspects in deciding if the expected return is worth the risk. The Capital Asset Pricing Model (CAPM) provides a base from which both the risk and the affects of the risk are determined by the investor while the Discounted Price Flow Model (DPCM) can help the investor decide what amount they are willing to invest in a company in anticipation of projected future cash flows. As indicated in the previous paragraph, the Capital Asset Pricing Model is a tool used in determining the risk of an investment and in turn, deciding if the risk is worth the investment. The CAPM …show more content…

The DPFM gives a bona fide stock value because it does weigh all of the inputs unlike other avenues such as P/E's and price-to-sales ratios in which stocks are compared to one another rather than judged on intrinsic values. (Investopedia)

Debt Equity Mix
The cost of debt is equivalent to the interest rate a corporation, and individual, or a household is paying on all of its debt such as loans or bonds. Debt is inclusive of repayment later, just as savings can be used later. It is believed that corporations with higher debt are frequently the riskier conglomerates. The risky behavior of some businesses can sometimes be attractive to potential investors, while causing others to shy away. Household debt unfolds similarly to that of major corporations, but on a smaller scale. While the bulk of credit in a household is extended in the form of mortgages, a lot dwells in the plastic credit cards. Unfortunately, credit is often used to bridge the gap in income or temporary drops and can ultimately cause the debt of a household to increase substantially. Credit cards often enable some households the consumption of possibilities that would not otherwise be around.
The characteristics of debt or one's income path help determine the growth of the market, increased interest rates, and timing. Debt differs from assets in many ways because it is in nominal

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