Capm

Course Financial Management II Instructor Dr Tahir Khan Durrani

ABSTRACT

We carried out this research to explore the two most commonly used models for stock valuation, namely the Capital Asset Pricing Model and Dividend Growth Model. We have been studying these models throughout our course of Financial Management II in the semester and hope that the knowledge we have gained is worthy of being presented in the form of this research paper. As we noticed, the models for stock valuation are applicable only under certain assumptions, which made us go into the depth of them and illustrate them through practical calculations, after which we could determine the causes for differences in the actual and predicted stock prices. By taking the tobacco industry of Pakistan into consideration, we have illustrated our findings through the stock valuation of Lakson Tobacco Company. The interesting thing was that in the text we read, it said that both the models are simple to use. However, when we applied the concept and formulae into real research, we learned how time consuming it is and how much mental energy needs to be put into it.

1

Course Financial Management II Instructor Dr Tahir Khan Durrani

INTRODUCTION

This research paper was conducted keeping in mind the following three objectives.

•

To analyze the two most commonly used models for the valuation of stocks in an economy, namely, Capital Asset Pricing Model (CAPM) and Dividend Growth Model.

•

To apply these models of stock valuation on a well-established company in Pakistan which in our case was Lakson Tobacco Company.

•

To assess any limitations of stock valuation in using the above mentioned models.

Our research included qualitative as well as quantitative analysis. Since our final aim was to propose how the intrinsic value of the shares of a firm are predicted, our first step was to do a thorough research on the Capital Asset Pricing Model and Dividend Growth Model. After...