Capital Asset Pricing: An Easy and Unified Solution

This chapter tries to solve the discount rate for equity, or equity pricing. Based on the models derived in Chapters “Certainty Equivalent, Risk Premium and Asset Pricing” and “Debt/​Loan Risk, Bankruptcy Cost and Debt/​Loan Pricing”, it is relatively easy to solve the problem. In the process, we find another easier way to work out the discount rate model for total capital, which can confirm each other with the reasoning in Chapter “Certainty Equivalent, Risk Premium and Asset Pricing”. Finally, a unified solution to capital asset pricing is built up, that is, a discount rate model series for debt, equity and total capital—all three models have unified structure (risk free rate + risk premium), based on the same risk measurement (company volatility) as well as unified concept and logic. Literally, our solution to discount rate or asset pricing is the fundamental solution. Based on such a solution, most issues concerning discount rate can be solved or answered. As examples, we further solve some related problems, such as the comprehensive application of ZZ growth model and ZZ CAPM, the relationships among the three discount rates, the long run tendency of the discount rates. The tendency of the discount rates has been hotly debated but can be solved soundly with our discount rate models.