The Role of the Capital Asset Pricing Model (CAPM) in Determining the Weighted Average Cost of Capital (WACC) (Analytical research)
Abstract
Many researchers and learners could not differentiate between the capital asset pricing model and the weighted average cost of capital. This prompted the researcher to shed light on and explain the role played by the capital asset pricing model in constructing and calculating the cost of capital according to the weighted average. The research also discussed that the pricing model extracts a percentage and not a real value, which surprises most followers because the model is called a pricing model and not a pricing ratio. But the truth is that the pricing model extracts the required return ratio, which is included in pricing the common stock according to the Jordan model. When pricing, the transaction costs for trading the stock will be calculated, and these costs are included in calculating the cost of capital. Accordingly, the capital asset pricing model is included in calculating the weighted average cost of capital. The research also reached a set of recommendations, the most important of which is to work on analyzing the financial models in all their details to help other researchers understand and know the method and mechanism by which these models work.
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