Assignment of Mergers & Aquisitions Example | Topics and Well Written Essays - 2500 words

Of Mergers & Aquisitions - Assignment Example According to Zabihollah Rezaee in the book Financial Institutions, valuations, mergers and acquisitions: †¦. The author states that for mergers or acquisitions it is necessary to find the economic value of the asset that is being brought or sold. By the economic value of the asset it means the â€Å"total economic environment associated with the asset, the potential use of the asset, timing of the value estimate, location of the asset, extent of ownership involved.† (2001). Financial Institutions, valuations, mergers and acquisitions: the fair†¦. By Zabihollah Rezaee, p 165. The CAPM, the ICAPM, and the Multifactor Model are the three different model used to estimate the cost of equity in the circumstance of merger and acquisitions. There are various factors which affect the merger and acquisitions of the companies. Capital Asset Pricing Model: All investment has a there own risk constituent in every industry. The amount of risk in the one industry is defers from ano ther industry and also from organization to organization. The Capital Asset Pricing method is a financial model for assessing stock, derivative, security and assets by concerning risk and anticipated rate of return. Capital Asset pricing method is based on the thought that depositors demand extra anticipated return. Business organization countenance various risk at their day to day affairs. To recognize these risks is the one of the most significant jobs that the financial manager required to perform. To recognize the various kinds of risk, their computing, the methods to reduce or recompense risk and risk-return affiliation elucidated by the CAPM three terms have to be described. These three terms are risk aversion, risk-return affiliation and risk. The relationship between risk-return describes the relationship among risk and anticipated rate of return. â€Å"The general idea behind CAPM is that investors need to be compensated in two ways: time value of money  and risk. The ti me value of money is represented by the risk-free (rf) rate  in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on  additional risk.† (Capital Asset Pricing Model: CAPM, 2011). Capital assets pricing has been various functions. One of the main functions of this model to create the comparative study of the risk and return of the particular market. And also the model is also made on the basis of various assumptions. There is difference between the Capital Asset Pricing model, Intertemporal Capital Asset Pricing Model and The Multifactor Model. Intertemporal Capital Asset Pricing Model: The Intertemporal Capital Asset Pricing Model (ICAPM) is used to decide estimated asset returns. The main dissimilarity among the CAPM and ICAPM the extra state variable that recognized the fact the depositor’s hedge i n opposition to deficits in consumption or in opposition to alterations in the future investment chance set. Intertemporal Capital Asset Pricing Model takes probable risks issues into consideration and also it exposes all the risk so that depositors identify the all the risks. In stock market depositor is mainly accumulate financial earning by numerous ways. â€Å"In contrast to the CAPM, the ICAPM allows multi-period portfolio choice and time variation in investment opportunities. In this context, the