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Firm Value and the mis-use of the CAPM for valuation and decision making

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  • Magni, Carlo Alberto

Abstract

This paper shows that a decision maker using the CAPM for valuing firms and making decisions may contradict Modigliani and Miller’s Proposition I, if he adopts the widely-accepted disequilibrium NPV. As a consequence, CAPM-minded agents employing this NPV are open to arbitrage losses and miss arbitrage opportunities. As a result, even though the use of the disequilibrium NPV for decision-making is deductively drawn from the CAPM, its use for both valuation and decision should be rejected.

Suggested Citation

  • Magni, Carlo Alberto, 2005. "Firm Value and the mis-use of the CAPM for valuation and decision making," MPRA Paper 6608, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6608
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    File URL: https://mpra.ub.uni-muenchen.de/15688/1/MPRA_paper_15688.pdf
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    References listed on IDEAS

    as
    1. Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany.
    2. Roszkowski, Michael J. & Snelbecker, Glenn E., 1990. "Effects of "Framing" on measures of risk tolerance: Financial planners are not immune," Journal of Behavioral Economics, Elsevier, vol. 19(3), pages 237-246.
    3. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-181, March.
    4. Magni, Carlo Alberto, 2002. "Investment decisions in the theory of finance: Some antinomies and inconsistencies," European Journal of Operational Research, Elsevier, vol. 137(1), pages 206-217, February.
    5. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," The Journal of Business, University of Chicago Press, vol. 55(2), pages 233-251, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Firm value; Free Cash Flow; CAPM; Modigliani and Miller’s Proposition I; Net Present Value; disequilibrium; arbitrage; decision making;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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