compare and contrast capital asset model to the free cash flow model?

Solutions

Expert Solution

Capital asset model basically states expected return on asset is equal to risk free rate plus a risk premium that asset carries relative to the market it operates in. Capital asset model is used to price risk of an asset relative to the market. Capital asset model is utilized to measure risk premium inherent (generally in a capital market investment - equity/portfolio).

Thus capital asset model is to compare expected return vs the risk taken.

whereas

the free cash model relies on the expected cash flows generated by that asset discounted to present value using the weighted average cost of capital being invested. Free cash model is basically utilized for capital budgeting.

The free cash model is to judge whether present value of future cash flows are more than the investible funds, across opportunities and the one which provides a better value relative to amount invested today can be chosen for investment.

jeff jeffy answered 2 months ago

Next > < Previous

Related Solutions

Compare and contrast the international capital asset pricing model to the domestic capital asset pricing model....

Compare and contrast the international capital asset pricing model to the domestic capital asset pricing model. Your response should be at least 200 words in length.

Compare and contrast Free Cash Flow, Cash Flow (balance sheet to balance sheet) and CFO (6...

Compare and contrast Free Cash Flow, Cash Flow (balance sheet to balance sheet) and CFO (6 points)

12. 3: Basic Stock Valuation: Free Cash Flow Valuation Model Basic Stock Valuation: Free Cash Flow...

12. 3: Basic Stock Valuation: Free Cash Flow Valuation Model Basic Stock Valuation: Free Cash Flow Valuation Model The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the free cash flow valuation model. The market value of a firm is equal to the present value of its expected future free cash...

Discounted Cash Flow Models discussed: The Adjusted Present Value Model The Free Cash Flow to Equity...

Discounted Cash Flow Models discussed: The Adjusted Present Value Model The Free Cash Flow to Equity Model What are the advantages and shortcomings of each? Which one do you think is generally better to use? Why?

DO NOT ANSWER Should the dividend discount model and free cash flow model yield the same...

DO NOT ANSWER Should the dividend discount model and free cash flow model yield the same stock price? What are the advantages and disadvantages of the free cash flow valuation model relative to the dividend growth model? What situation is ideally suited to valuation with the dividend growth model?

Question