CAPM & DCFM Essay Example | Topics and Well Written Essays - 500 words

CAPM & DCFM - Essay Examplethe time value of the money. The more the investment is held, the higher would be the take back required by an investor as money loses its value over time (Fama, 2004).The Discounted Cash Flow (DCF) rule on the other hand is a method that is apply in decree to ascertain the appeal of any particular investment. The DCF technique uses hard currency understructure rather than accounting valuation techniques in order to analyze the attractiveness of any particular investment. Hence it considered less subjective because of its cash flow techniques. The cash flows that would be gained from any particular examine are discounted using an appropriate discount number establish upon the market rate and the investors expectations in order to reflect the time value of money. If the value deduced afterwards discounting i.e. the present value is greater than the outflows (usually required at the current time horizon), the project is accepted (Kaplan, 1994).The C APM is utilise to calculate the required return of an investor. This required return is then apply as a basis for the DCF method in order to ascertain the Present Value of any given project/investment. The CAPM is used in order to calculate the discount rate and this discount rate is further used in spite of appearance the DCF technique in order to value an investment or an asset. The CAPM uses the risk free rate in order to reflect the time value of the money. The market risk premium (i.e. the expected return rate indoors the market less the risk free rate) is multiplied with the relevant project beta this project beta denotes the investors risk (Eugene et al, 2011 Kaplan, 1994).Usually, companies use the CAPM to ascertain the cost of equity. This cost of equity is further used to calculate the Weighted Average Cost of Capital (WACC) of a firm and finally this WACC is used inwardly the DCF technique in order to calculate the Net Present Value (NPV) of a project/investment. The WACC within the NPV technique denotes the required