Purchase Solution

Decision Models - CAPM and Residual Earnings

Not what you're looking for?

Ask Custom Question

Please see attached question. Thank you!

MD&A includes the manager's forecasts for the firm's future. Specially, the forecasts can help to estimate future cash flows or future earnings that can be generated by the firm. Which decision model can most benefit from the forecasts?

A. CAPM
B. Residual Earnings Model
C. Equally Beneficial.

Attachments
Purchase this Solution
Solution Summary

The solution uses decision models that calculate CAPM and residual earnings.

Solution Preview

Please refer to the attached file for the response.

CAPM AND RESIDUAL EARNINGS MODEL

Concepts
According to Keown et al. (2002), CAPM is an equation that equates the expected rate of return on a stock to the risk-free rate plus a risk premium for the stock's systematic risk. These authors further noted that the CAPM provides an intuitive approach in determining the return that an investor should require on all investments, given the asset's systematic or market risk.

This concept is confirmed by an online source when it noted that, "The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free ...

Solution provided by:
Elisa Valdez, PhD
Education
  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
Recent Feedback
  • "Excellent information thanks for the input"
  • "Thank you"
  • "Very thorough and informative. Thank you."
  • "Good response. Very detailed"
  • "This solution is excellent. Thank you"
Purchase this Solution
Free BrainMass Quizzes
Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Operations Management

This quiz tests a student's knowledge about Operations Management

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

View More Free Quizzes
Related BrainMass Solutions

  • Cash Flow Valuation Model

    The residual income model expresses value as the current book value of the firm plus the present value of expected future residual income, where residual income (or abnormal earnings) equals earnings in excess of a normal return on beginning-of-period

  • Valuation Models: ConocoPhilips

    s=COP+Key+Statistics Annual Report 2010 Regards Jayant Kumar This solution shows how to use the capital asset pricing model (CAPM), price/earnings to growth (PEG), and dividend discount model (DDM) valuation models to justify the 2010 market price

  • CAPM and the Constant Dividend Growth Model

    The variables in these models are a product of best guess estimates and assumptions, thus the stock value one arrives at using these models are at best rough estimates.

  • Now that you have read about the CAPM, would you ever use it

    Before Netflix and Redbox exist, their earnings look very promising to the investors, but when they first issued their big loss of that quarter, investors who are just looking at the beta will think it's a good time to buy more even though it's actually

  • Managerial Analysis: Capital Asset Pricing Model vs. Discounted Cash Flows Method

    The most important thing to also remember regarding the CAPM and DCF models is that while the former is a risk and return model, the DCF actually belongs to the class of valuation models.

  • Dividend Policy

    As a part of the financing decision the dividend policy of the firm is a residual decision and the dividends are a passive residual. It is based on the assumption that investors are indifferent between dividends and capital gains.

  • CAPM vs. DDM vs. APT (General Mills Case Study)

    General Mills: Earnings and Dividends. Retrieved February 2012 from http://eresearch.fidelity.com/eresearch/evaluate/fundamentals/earnings.jhtml?stockspage=dividends&symbols=GIS Foroohar, R, (2011). A New Era of Volatility.

  • CAPM, Dividend Growth or APT: Rate of Return Estimate

    257703 CAPM, Dividend Growth or APT: Rate of Return Estimate Which of the three models (dividend growth, CAPM, or APT) is the best one for estimating the required rate of return (or discount rate) of Safeway?

  • annuity and dividends for common stocks.

    ., has $20 million in earnings, pays $2.75 million in interest to bondholders, and $1.80 million in dividends to preferred stockholders. a. What are the common stockholders' residual claims to earnings? b.

View More Related Solutions