1) Cost of Average Weighted Capital.
2) CAMP Model: The Capital Pricing Model
a) Sharpe model.
b) Markowitz model.
c) Robert Hamada model.
a) Sharpe model
b) Robert Hamada model
TLR: Risk-free rate.
PRN: Premium for business risk.
PRF: Premium for financial risk.
Sharpe model assumptions
1) All investors have the same time horizon of a period.
2) The future probability distributions of the returns of the different securities for the reference period are the same for all investors. In other words, there are homogeneous expectations.
3) All investments or individual assets are infinitely fractional.
4) There are no taxes on capital gains or dividends. There are no transaction costs in the purchases and sales of securities.
5) All investors are efficient diversifiers, that is, they are located on the efficient frontier of the region of possible portfolios, defined in the mean - variance model.
6) You can lend and borrow the amount of money you need, at a risk-free rate.
7) There is no inflation.
goals
- Creation of a correction factor to cushion the adverse effect produced by inflation.
In the event that inflation exists, the rate must increase, as well as the wacc rate, in other words, the discount of future flows must be at a wacc rate that punishes said flows due to inflationary effects, that is, the higher inflation, the higher the rate. wacc.
With the aforementioned we obtain:
a) Increase in the wacc rate.
b) Decrease in NPV.
c) The IRR remains indifferent.
d) IR Decreases.
e) Similarly for all indicators that use a discount rate.
Theorem 1: An increase in income tax can produce new tax savings:
Example:
Theorem 2: Adjustment for inflation and opportunity cost for the investor:
The inflation adjustment is intended to consider the inflation rate in the calculation of the beta with leverage. It is estimated that the risk premium considers inflation. The risk-free rate is almost indifferent to inflationary fluctuations, since this rate is a reference for risk-free instruments such as instruments provided by the central bank, government, etc.
Supporting measure
While it is true, the measure is conservative:
Would it lead to wrong decisions in business organizations?
Atte the Helper…
