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

Capital Asset Pricing Model - Essay ExampleThis model has been heavily criticised and debated oer the past decades, and many of the economists are of the opinion that this framework is not adequate enough to assess discordant risk factors comprehensively. However, none of the opponents could introduce a potential alternative to this archetype till date. This paper entrust critic all in ally analyse the applicability of the CAPM in corporate finance applications in the context of modern fear environment. Corporate applications of CAPM Hillier et al (2008, section 5.1) provide a detailed view of the corporate applications of the capital summation pricing model. Through a well integrated theoretical concept and empirical evidences the authors give readers an mild understanding of the applicability of CAPM in corporate finance. Through this section, the authors address the misconception that the CAPM theory is applicable only to enthronement purposes. The application of capital a sset pricing model together with mean variance analysis is greatly supporting corporate managing directors in decision making process today (Grinblatt & Titman 2003, p. 132). The author argues that a manger is most desirely to lose his job if his organisation is continuously struggling with declining stock prices (ibid). Hence either 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 value. Such knowledge would greatly service corporate managers to determine what actions would improve the stock value and thereby serve the interest of stockholders and directors. For instance, the combined application of CAPM and mean variance analysis may help firms to hedge their risk elements to a great extent and diversify their portfolios of solid investment projects (Grinblatt & Titman 2003). The CAPM model also benefits multinational corporations to scrutinise their capit al expenditure decisions. care theories and historical evidences clearly indicate that thoughtless capital expenditures would lead to corporate failures. Top executives are exceedingly 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 pla nning since the development of this concept. Scholars opine that capital budgeting is one of the major corporate applications of the CAPM. If it is feasible to predict the systematic risk associated with a project accurately, then the CAPM can be applied to estimate the risk adjusted discount rate which is essential to compensate the organisation for the risk elements of the project.