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

Magni, Carlo Alberto (2005): Firm Value and the mis-use of the CAPM for valuation and decision making.

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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.

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