Capital Asset Pricing Model (CAPM)
Divestopedia Explains Capital Asset Pricing Model (CAPM)CAPM is a calculation of the risk related to the equity of a business. The model takes into account the risk of the particular business and the industry it operates in. It also tasks into account movements in returns for the market as a whole.
The CAPM based rates of return represent a rate of return on equity, not a discount rate or WACC. To calculate the discount rate or WACC, the cost of debt and appropriate capital structure must be assess. A growth rate deducted from the WACC will result in a capitalization rate that can be applied to free cash flows before interest costs to determine enterprise value.
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