Best Answer

C.A.P.M describes the relationship between beta, market risk and expected return of the investment. In order to use the CAPM to estimate the cost of capital for this investment decision, we need to historical data, extract their levered beta, determine the appropriate manner to average them, and apply the resulting risk to the investment's CAPM.

User Avatar

Wiki User

14y ago
This answer is:
User Avatar

Add your answer:

Earn +20 pts
Q: How can the CAPM be used to estimate the cost of capital for evaluating real investment decisions by a firm?
Write your answer...
Still have questions?
magnify glass
Continue Learning about Math & Arithmetic

What does capital income mean?

Capital income can be defined as the income that a person or business makes from the sale of their capital investment assets.

What does investment to GDP ratio mean?

It is the ratio of the amount of money spent on investment in plant and capital - including stocks (inventories) over a period of time compared to the total output of the country (or region).

What happens if the IRR is greater than the required rate of return?

The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum required rate of return - the cost of capital - then the decision would generally be to go ahead with it. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it.

What are the disadvantages of the discounted payback period?

It's not a direct measure of a project's contribution to stockholder's wealth. You may reject project's that should be accepted when using the NPV analysis (best method used for determining whether or not a project is accepted in Capital Budgeting). Discounted Payback Period AdvantagesConsiders the time value of money Considers the riskiness of the project's cash flows (through the cost of capital) Disadvantages No concrete decision criteria that indicate whether the investment increases the firm's value Requires an estimate of the cost of capital in order to calculate the payback Ignores cash flows beyond the discounted payback periodYounes Aitouazdi: University of Houston Downtown

What rate of interest compounded annually is required to triple an investment in 30 years?

3.73% would do it almost exactly: Where p is the original investment and i is the rate of interest: 3p = p((1 + i/100) to the power of 30) dividing by p gives ((1 + i/100) to the power 30) = 3 using logarithms (log 3)/30 = 1 + i/100 antilog (0.47712/30) = 1 + i/100 antilog 0.0159 = 1 + i/100 1.037299 = 1 + i/100 0.037299 = i/100 i = 3.7299 Later: I tested this on Excel with capital of 5000 and interest rate of 3.73% and after 30 years investment was worth 15000.35!

Related questions

How are capital investment decisions made?

Capital investment decisions are made by a group of executives in a business firm. These decisions are crucial to the longevity of not only the business but also the future stockholders of that company.

A method of evaluating capital investment proposals that ignore present value?

internal rate of return

Method of evaluating capital investment proposals that ignore present value?

internal rate of return

What services does Wells Capital Investment Solutions offer?

Wells Capital Investment Solutions offers legacy portfolio management, fund management, investment decisions advice, and a range of investment management solutions exclusively for professional advisers.

Is capital budgeting and capital investment decisions are same?

Yes it is the different names which are used interchangibally for the same process name.

Why is the marginal cost of capital more relevant to making investment decisions than the historic cost of capital?

because of deprecation

Instruments of Capital Markets?

 Understanding the instruments of capital market is essential for investors who want to make informed investment decisions.

What is capital budgeting decision under uncertainty and risk?

Capital budgeting entails decisions to commit present funds in long term investment in anticipation of future returns. The future is usually of long term nature spanning over five years. The amount of investment and the returns from the cannot be predicted with certainty due to certain variables like market for the product, technology, government policies, etc. The uncertainty associated with the investment and the returns is what makes decision makers to consider probabilty distributions in their estimates, hence, making capital budgeting to be considered under uncertainty and risk.

What are the basic financial decision in an organization?

The basic financial decisions include long term investment decisions, financing decisions and dividend decisions. Investment Decision relates to the selection of assets in which funds will be invested by a firm. These decisions are of two types Capital Budgeting Decisions and Working Capital Decisions. Financing Decision is broadly concerned with the asset-mix or the composition of the assets of a firm. The concern of the financing decision is with the financing-mix or capital structure or leverage. Dividend Policy Decision isrelated to the dividend policy.

What is the effect on IRR if cost of capital decreased?

A change in the cost of capital will not, typically, impact on the IRR. IRR is measure of the annualised effective interest rate, or discount rate, required for the net present values of a stream of cash flows to equal zero. The IRR will not be affected by the cost of capital; instead you should compare the IRR to the cost of capital when making investment decisions. If the IRR is higher than the cost of capital the project/investment should be viable (i.e. should have a positive net present value - NPV). If the IRR is lower than the cost of capital it should not be undertaken. So, whilst a higher cost of capital will not change the IRR it will lead to fewer investment decisions being acceptable when using IRR as the method of assessing those investment decisions.

What is capital structure decisions?

capital structure decisions are structure with decisions

Capital budgeting techniques in Indian industries.?

Capital budgeting techniques in Indian industries include researching long term investment decisions and making business decisions based on predictions. Evaluations are made and changes can be implemented if an Indian industries need them. .