Firm Value and the mis-use of the CAPM for valuation and decision making

Carlo Alberto Magni

MPRA Paper from University Library of Munich, Germany

Abstract: This paper shows that a decision maker using the CAPM for valuing firms and making decisions may contradict Modigliani and Miller’s Proposition I, if he adopts the widely-accepted disequilibrium NPV. As a consequence, CAPM-minded agents employing this NPV are open to arbitrage losses and miss arbitrage opportunities. As a result, even though the use of the disequilibrium NPV for decision-making is deductively drawn from the CAPM, its use for both valuation and decision should be rejected.

Keywords: Firm value; Free Cash Flow; CAPM; Modigliani and Miller’s Proposition I; Net Present Value; disequilibrium; arbitrage; decision making (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 M21 (search for similar items in EconPapers)
Date: 2005-10
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Related works:
Working Paper: Firm Value and the mis-use of the CAPM for valuation and decision making (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:7093

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