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A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One?

  • Ekern, Steinar

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Betas computed from returns based on investment cost rather than on market value, may give systematically inappropriate discount rates and numerically incorrect present values for nonzero NPVs and "mispriced" assets. The paper provides a self contained collection of a "baker's dozen" consistent CAPM-related methods, that all give correct valuation results. The models include approaches based on certainty equivalents, equilibrium and disequilibrium required discount rates, simplified discounting rules for particular cash flow formulations, as well as required adaptations to make valuations from more advanced valuation methods consistent with correct CAPM procedures. Additional issues and relations related to different betas are also discussed and partly extended. Derivations of the valuation methods are shown in an appendix. A running base case numerical example illustrates the various procedures.

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File URL: http://hdl.handle.net/11250/163610
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/6.

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Length: 44 pages
Date of creation: 30 May 2006
Date of revision: 25 Apr 2007
Handle: RePEc:hhs:nhhfms:2006_006
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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