Finance 355; 7:00pm, Cutler

Long Term Financing Paper | CISCO Inc. | Team Advantage: |

CAPM Model & Discounted Cash Flows
Capital Assets pricing and Discounting Cash flow are the widely used valuation methods for investment. ¾ of US companies using CAPM for Capital budgeting. General idea behind a CAPM is that investors need to be compensated for the risk that they are taking. Under the CAPM we are observing how much return Cisco’s investors are expecting.
For the Calculation CAPM for CISCO we used numbers based off industry standards from S&P 500 and U.S. Treasury. CISCO Beta was calculated at 1.18 (source: http://finviz.com/quote.ashx?t=csco). For the risk free rate 0.17% was calculated based of the yearly US treasury rate from 2012 (source: http://www.treasury.gov ). 11.62% is the market risk based on the YTD return for the S&P 500 (source: http://money.cnn.com/data/markets/sandp/). 12.97% would be the expected/required return for CISCO.
CAPM is calculated as follows:

= 0.17% + 1.18 (11.79 -0.17)
= 0.17+ 1.18 (11.79 – 0.17)
= 1.35 (11.62)
= 12.97% Discounted Cash Flow Model relies on future cash flow. It is described as "discounted" cash flow because cash in the future is worth less than cash today. DCF says that a company is worth all of the cash that it could make available to investors in the future. There are 3 approaches to DCF: PV, NPV, DDM. We need 3 input for DCF model: projected CF, discount rate and length of time for ongoing project, also growth rate if project considering to be perpetual. Discount rate for the project is also Cost of Capital since the project must earn enough to pay its suppliers (Stockholders and bondholders). As a discount rate we can use CAPM, WACC, or we can drive it from DDM. Since we have CAPM we can calculate Cost of debt and come out with our discount rate of WACC. WACC = Cost of debt +