Valuation Glossary

The Capital Asset Pricing Model (CAPM) is a financial tool used to estimate the expected return on an investment based on its risk. It considers two types of risks: systematic risk and unsystematic risk. Systematic risk is the risk related to the overall market, while unsystematic risk is specific to a particular company or industry and can be reduced through diversification.


The CAPM formula is:


Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)


The formula takes into account the risk-free rate, which represents the return on a risk-free investment, and beta, which measures the investment's sensitivity to market movements. The market return reflects the average return expected from all investments in the market.


By using the CAPM, investors can estimate the appropriate return they should expect for taking on a certain level of risk. However, it's important to note that the CAPM relies on certain assumptions that may not always hold true in practice.


In simpler terms, the CAPM helps investors determine how much return they should expect based on the riskiness of an investment compared to the overall market.

Business valuation is the process of determining the monetary value of a business. It involves assessing various factors like the company's financial performance, assets, market conditions, and industry trends. Valuation is done for purposes such as buying or selling a business, mergers and acquisitions, fundraising, financial reporting, or legal disputes. Different methods are used to calculate the value, taking into account factors like earnings, comparable companies, and assets. Professionals with expertise in valuation perform this assessment to help inform business decisions and transactions.

Business risk refers to the possibility of negative events or uncertainties that can harm a business's financial performance or operations. These risks can come from various sources, such as changes in the market, financial issues, operational problems, legal and regulatory compliance, reputation damage, or environmental factors. Managing business risks involves identifying and addressing potential problems to protect the business and ensure its long-term success.

A business enterprise is an organization that operates to make money by providing goods or services. It includes all aspects of the business, like its owners, operations, resources, and goals. It engages in economic activities, has a structure and hierarchy, and uses resources to meet customer needs and earn profits. It faces risks and seeks rewards in the market. A business enterprise can take different legal forms and operates within specific industries.

A business combination is a transaction or event in which one company acquires control over one or more businesses. This can involve the purchase of a controlling interest in another company, merging with another company, or acquiring its net assets.