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dc.contributor.authorEkern, Steinar
dc.date.accessioned2006-07-11T10:23:25Z
dc.date.available2006-07-11T10:23:25Z
dc.date.issued2006-05
dc.identifier.issn1500-4066
dc.identifier.urihttp://hdl.handle.net/11250/163609
dc.descriptionFirst draft: January 15, 2006en
dc.description.abstractThis paper focuses on applications of the CAPM in capital budgeting and in valuation of "mispriced" financial assets. Most textbooks in finance do not warn against a common pitfall in discounting expected cash flows by risk adjusted discount rates that are conceptually inconsistent with the CAPM. Betas computed from returns based on investment cost rather than on market value, may give systematically inappropriate discount rates and numerically incorrect present values for non-zero NPVs and "mispriced" assets. The paper provides a self contained collection of a dozen consistent CAPM-related methods, that all give correct valuation results. The models include approaches based on certainty equivalents, equilibrium and disequilibrium required discount rates, simplified discounting rules based on absence of arbitrage for particular cash flow patterns, as well as required adaptations to make valuations from more advanced valuation methods consistent with correct CAPM procedures. Derivations of the valuation methods are shown in an appendix. A running base case numerical example illustrates the various procedures. Further illustrations are provided by a textbook example that also demonstrates how some simple procedures work for more complex cases than previously recognized.en
dc.format.extent251751 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoengen
dc.publisherNorwegian School of Economics and Business Administration. Department of Finance and Management Scienceen
dc.relation.ispartofseriesDiscussion paperen
dc.relation.ispartofseries2006:6en
dc.subjectCAPM present valuesen
dc.subjectdisequilibrium valuationen
dc.subjectcost based betasen
dc.subjectsimple rulesen
dc.subjectJensen's alphaen
dc.subjectabsence of arbitrageen
dc.subjectCAPM adaptationsen
dc.titleA dozen consistent CAPM-related valuation models : so why use the incorrect one?en
dc.typeWorking paperen


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