Capital Asset Pricing Model (CAPM)

Week 4 Prompt

CAPM
The capital Asset Pricing Model (CAPM) is a valuation model used to analyze capital
investments. CAPM works based on the assumption that financial markets are efficient,
uniformly distributed information and that investors are risk-averse and only invest to maximize
their returns. CAPM valuation model utilizes a risk-free rate to account for the time value of
money. CAPM considers the market risk (beta), which measures the level of risk of an asset in
relation to the market. Any return above the risk-free market rate is referred to as the risk
premium.
Constant Growth Model
The constant growth model is an investment valuation model that works based on the
assumption that the income from the asset will grow at a uniform rate into perpetuity. The model
discounts future cash flows to their present value to determine the intrinsic value of a bond. The
assumptions in this model are also its limitations since it is illogical to assume that an
organization will grow at the same rate into perpetuity and payout dividends at a constant rate.
The rate of return must always be greater than the constant growth rate for this model to work.

Week 5 Prompt

Depreciation affects cashflows even though it is not a cash expense. When organizations
compute their tax liability for the year, they include a depreciation to reduce the tax payable.
This only works in jurisdictions where the government allows depreciation as a tax-deductible
expense. When companies plan their cashflows, they budget for taxes whose amounts may be
affected by depreciation. Accelerated depreciation further reduces the amount of taxes payable

by further increasing depreciation expense. Therefore, the budgeted cash outflow reduces due to
reduced tax payable in the case of tax-deductible accelerated depreciation.
Ensuring timely financial audits by independent auditors would ensure that related
financial details are captured using the required accounting standards. Independent auditors
provide extra analysis on financial statements and determine the accuracy of the organizational
accounting standards. Auditing helps organizations identify potential risks in fraud, accounting
gaps and errors, and compliance risks. Organizations can rely on auditor’s recommendations to
make sound business decisions. Budgets also ensure that financials are tracked. Budgeting
encompasses an organization’s capital and operational expenditure, direct and indirect expenses,
and provisions. Income and expenses are compared against the budget to identify and correct
anomalies.