7.12 EQUILIBRIUM VALUE OF THE FIRM: OVERVIEW
In this section we derive the CAPM directly from the demand for and supply of risky securities in the capital markets. This version of the capital asset pricing model can be applied to the total cash flows from a firm, a division, or some particular set of risky investment projects. As a result, it is a useful form for considering problems that arise in corporate finance.
This general equilibrium form, first derived by Mossin (1967), is presented in topic 7.13, Firm Value: A General Equilibrium Description. A formal derivation appears in topic 7.14, Firm Value: A General Equilibrium Construction. Application of this model is then illustrated for the Three-Firm Case. Finally, we discuss some important Corporate Finance Implications.
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