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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


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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7093.

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Date of creation: Oct 2005
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Handle: RePEc:pra:mprapa:7093

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Keywords: Firm value; Free Cash Flow; CAPM; Modigliani and Miller’s Proposition I; Net Present Value; disequilibrium; arbitrage; decision making;

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  1. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 167-81, March.
  2. Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany.
  3. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 55(2), pages 233-51, April.
  4. Magni, Carlo Alberto, 2002. "Investment decisions in the theory of finance: Some antinomies and inconsistencies," European Journal of Operational Research, Elsevier, Elsevier, vol. 137(1), pages 206-217, February.
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