Running Head: LONG TERM FINANCING
Long Term Financing
Amber Collins, Taneka Gurley, Shannon Syphus, Wendy Williams
MBA 503: Introduction to Finance and Accounting
2 March 2008
This paper discusses various long-term financing advice for company growth. Common investments are broken down comprehensively.
The Capital Asset Pricing Model (CAPM) is “a model that describes the relationship between risk and expected return, used in pricing of risky securities” (Investopedia, 2008). Returns on common stock, as well as market indexes of stock performance, “…over time have generally been used to test this model since stock prices are widely available and efficiently priced…” (Block-Hirt, 2004). The formula used in the CAPM model is as follows: [pic]e. [pic] represents the return on the individual common stock of a company, [pic] represents the intercept of the y-axis of linear regression, [pic] is the coefficient (historical data), [pic] represents the return on the stock market, and e represents the error of the regression equation. (Block-Hirt, 2004) One thing to keep in mind when utilizing the CAPM is that it is an expectational model, going solely off previous historical data and is not guaranteed to follow these suggestions.
Discounted Cash Flows Method is a “…valuation method used to estimate the attractiveness of an investment opportunity” (Investopedia, 2008). This method analyzes future cash flow projections using a weighted average to discount them, arriving at a present value (Investopedia, 2008). The formula for this method is[pic]. FV would represent the future value of the investment, [pic] represents the discounted rate, and n the period of time. (Block-Hirt, 2004)
Both models depict roughly the same idea, the amount of return on an investment over a given period of time. The difference between the two models is that the CAPM takes into consideration previous historical data dealing with the company. This could...