Reference no: EM132431290

Problem: Assume the CAPM is used to form the weighted average cost of capital (WACC). Form a discussion on the CAPM in which you describe each of the following issues.

• Determine how diversification is important in the formation of the CAPM. The discussion should focus on the topics of total risk, systematic risk, and unsystematic risk.
• Define and provide numerical illustrations for the CAPM. Show how the model adjusts across different inputs and the consequence for valuation.
• Research and defend the validity of the CAPM given the academic literature. Based upon this model, explain the ways that managers can form initiatives to enhance the value of the corporation. Provide numerical illustrations of these initiatives based upon modifying the assumptions in the model and re-calculating the final value. For example, demonstrate how increasing or decreasing the sales growth rate will affect the bottom line valuation of common equity.