1) Auditors and regulators are reminding firms to look closely at their accounts payable to be sure they haven’t inadvertently created debt that might alter leverage ratios and violate other loan covenants. What’s the deal?
2) Major disruptions in global politics and economics will disrupt financial markets. 9/11, the Greek Crisis, and the recent Brexit all being good cases. How do these events impact interest rate expectations and therefore IRP between major currencies?
3) Why would the impact of shares repurchases be different across different time horizons? Do you think share repurchases are more valuable to the firm’s longer term objectives during the times of systemic crises (e.g. COVID19)?
4) https://markets.businessinsider.com/news/stocks/insiders-cash-out-via-ipos-investor-optimism-becomes-excessive-2020-12-1029919751 (Links to an external site.) (also attached below). In your opinion, do insiders’ sales of shares act as a signal that the stock is currently over-valued? Why? Why not?
5) Consider Apple stock. Apple’s valuations are heavily dependent on intangible assets valuations, as the company is a heavy user of intangible capital in its revenue generation model (think Apps platform). At the same time, Apple is one of the five largest companies in the world. This means that Apple’s stock price changes are systematic to the entire market: when Apple stock rises or falls, markets tend to rise or fall too.
Looking back at the assumption and definition of the APT, in your opinion, does APT apply in the case of the market that is so heavily dominated by Apple? Explain your thinking.
6) In our required readings we covered two papers, both highly critical of the CAPM. The two papers are:
- Fama, Eugene F. and French, Kenneth R., The Capital Asset Pricing Model: Theory and Evidence (August 2003). Available at SSRN: https://ssrn.com/abstract=440920 (Links to an external site.) (Links to an external site.) or http://dx.doi.org/10.2139/ssrn.440920 (Links to an external site.) (Links to an external site.)
- Fernandez, Pablo, CAPM: An Absurd Model (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=2505597 (Links to an external site.) (Links to an external site.) or http://dx.doi.org/10.2139/ssrn.2505597 (Links to an external site.) (Links to an external site.)
Despite this criticism, CAPM is still being widely used in corporate finance and in some investment management applications around the world.
Q: Can you think of any valid reasons why CAPM is still being used in practical or applied finance?