JOURNAL OF INTERNATIONAL ACADEMIC RESEARCH FOR MULTIDISCIPLINARY Impact Factor 1.625, ISSN: , Volume 3, Issue 5, June 2015

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1 ESTIMATE THE REQUIRED RATE OF RETURN IN LIGHT OF INFLATION BY USING THE CAP MMODEL Prof. Dr.HAKEM.M.MOHAMMAD* *College of Business and Economics University of Kufa, Iraq ABSTRACT The aim of this purely to determine the effect of the rate of inflation in required rate of return by an investor who invests his money in the investment opportunity given in circumstances where he is this investment political and economic problems reflect the impact on the components of the macroeconomic including companies operating within this economy and adoption model CAPM which includes account the risk premium market account with the rate of inflation and also reach search the impact of inflation in the required rate of return and the extent and impact of a positive correlation and spirits. KEYWORDS: Capital Asset Pricing Model, Beta Coefficient, Risk Premium 1. Introduction The capital asset pricing model (CAPM) is a model that gives you an appropriate expected rate of return (cost of capital) for each project if you give it the projects relevant risk characteristics. The model states that an investment s cost of capital is lower when it offers better diversification benefits for an investor who holds the overall market portfolio less required reward for less risk contribution. Market beta its measure of risk contribution. Projects contributing more risk (market beta) require a higher expected rate of return for you to want them; projects contributing less risk Require a lower expected rate of return for you to want them. This is the precise Relationship that the CAPM gives you. Methods The methods were applying in this study according to equations below:

2 2. Capital asset pricing model capital assets pricing model Is a model (CAPM) was present by sharp in 1964.to determine the market price of risk and the appropriate measure of risk as one of the economic models to solve the problem(copland, et.al,2005)to calculate the required rate of return on investments under conditions of risk, since each investor is willing to rate a high return on investment compared to investment of funds in the investment project, which is facing a racist time and risk. Meaning it is in front of two elements, the price of time, a rate of return risk-free, and the price of risk, risk premium market (RP) which is the difference between the return on the market portfolio and the return risk-free dividend for the element of risk that the investor faces. As it seeks an investor to choose the investment opportunity that maximizes his fortune, and if there are multiple investment alternatives, he chooses the alternative a higher return and risk, and at least according to the following basis (Sharp, 1964) 1-Return a similar and deviation low. 2-Deviation similar and return higher. 3-Return the highest and deviation low. It uses a model (CAPM) to calculate the required rate of return, calculate the cost of financing property, evaluate investment projects and this is better than the standard net present value (NPV), which is one of the evaluation criteria for investment projects proposed, and use the following equation to calculate the required rate of return without inflation which is equivalent (CAPM) The required rate of return in light of inflation, it will be added to the rate of inflation equation becomes (Weston & Copeland, 1986) Any added inflation to address its impact on the rate of return required. 3. Beta coefficient Beta coefficient is a measure of market risk and risk coefficient systemic a risk cannot be avoided diversification because include all the components of the national economy of any country and shows the relationship between earnings per share and return on the market (Lasher, 2011), as happened in Iraq and Afghanistan, Tunisia, Libya, Yemen, Egypt, Syria and Yugoslavia, where exposed these nations into wars that led to the inclusion of the components of the economies of these countries, including certainly corporate research topic, one of the industrial sector of the Iraqi exposed these companies to the problems and risks before and after the year 2003 the year of the occupation of Iraq, where there was an 397

3 economic blockade lasted 13 years in the wake of the war led military It is an alliance with America where all contributed to the destruction of the economic infrastructure of Iraq, all states that have teamed with America certainly reflects its impact on the performance of industrial companies and the calculated Beta coefficient is given by the following: (Ross, et al, 2005 ). The results of the calculation of beta companies concerned as in Table(1): Table 1 Beta coefficient for companies Com. C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13 C14 C15 Bata Notes that the Beta coefficient low for most companies except companies c7 and c5 either companies c5 and C11 and C10 and C14 and C2, where he was the highest beta 1.88 for the company C5 and a low beta 1.15 for my company C2 and C14 while the beta rest of the companies minus any no risk. 4. The risk premium The risk premium is the difference between the return on the market portfolio and the riskfree rate of treatment has been used in beta and interest on treasury transfers Iraqi and this percentage was due to the varying conditions experienced by Iraq, where no political stability and economic stability and the table (2) This includes interest. Table (2) The interest rate on Treasury Notes year Interest% on Source: Central Bank of Iraq. There is a clear disparity in the rate of interest on treasury transfers the spectrum due to economic conditions, wars and occupation of Iraq and the high rates of inflation as a result of economic conditions suffered by Iraq and the exchange rates of the Iraqi dinar, which was the exchange rate 3,333 dollars for every Iraqi dinars became the low price and calculated risk premium processing beta according to the formula the following: (Weston, et al, 1996) 5. Inflation rate: Is indicative prices or indices not consumer price basis for calculating The inflation rate and rising prices have either because of high costs or imported inflation or offer a particular country to the problems of political, economic and military, as happened with Iraq, which is 398

4 subjected to wars and the siege for years has increased to thirty years reflected the effects on all economic sectors, including the industrial sector and calculates the. The inflation rate for the following equation: (Krugman and Wells, 2009) In flation = price index in year2 price in year1/price index in year1 Increased rates of inflation in Iraq during the period already referred to, as in other variables of the Iraqi economy, affecting exchange rates and higher prices and interest any and all other variables in the Iraqi economy and experience these changes reflected the effects on economic sectors and projects that are affected by inflation, investment projects, where he hopes to investor get a good return for the money paid by investing therefore influenced by the rate of return required by an investor of the investment opportunity that has invested his money where the rate of inflation for the piece asks the investor risk premium to compensate for the risk resulting from inflation (Brealey, et al, 2008) where required to investors, particularly lenders Add Furthermore inflation and compensation for the decline in the purchasing power of money, which will get in the future is not limited to the impact of inflation on prices, but includes many variables, including the exchange rate (Madura, 2010), and table 3 shows the rates of inflation for the period from 2005 to 2013 in Iraq. Table3The inflation Rate for year Inflation % Source: Central Bank of Iraq 6. Required rate of return: The table shows (4) required rate of return for companies that have been selected for this research have varied results depending on The inflation rate and the rate of return riskfree in addition to return the wallet was low because the piece to the low performance of the companies resulting from a change in both the rate of inflation, which affected including encounters Iraq economic conditions were a reflection of the circumstances and political siege imposed by the international coalition on behalf of the United Nations, despite the fact that the justification of war and siege and occupation are illegal and inconsistent with the most basic rules of international law, but what happened to deal with Iraq and other countries falls under the illegal handling States that do not go in the boat George has led the American war on Iraq since 1991 and the siege for thirteen years to destroy the infrastructure of the Iraqi economy, which unlike its consequences on all sectors including the industrial sector which these results can be seen of them have either low or some negative where there is no 399

5 investor investment return is required to accept the negative, but these findings were the result of political and economic conditions, unfair on Iraq. Table (4)Required rate of return Year/C om. Co.1 O, Co Co Co Co Co Co Co Co Co Co Co Co Co Co Influence and the Correlation Table (5) the level of correlation between the required rate of return and The inflation rate, which has produced results and there is a strong correlation and moral between the two variables for each companies except one company co despite the existence of a link by 0.57, and the same amount was Beta coefficient, but the R2 was low and this means that it explains what of $ 0.32 from the impact and the results of this relationship is positive and significant for all companies and some of them were as much as 100% these results demonstrate the relationship between the two variables that The inflation rate after a clear and true on the required rate of return demanded by investors because of the expected results to the low purchasing power and therefore must take the changes in the rate of inflation resulting for political and economic conditions faced by companies operating in the economies of the 400

6 countries that are experiencing these conditions and Iraq was the most prominent countries that have suffered and faced such circumstances because targeted by the states claim of democracy and freedom, but stands strongly and conspiracy against the people who seek to liberation and salvation of the links to their economies some of these countries or that have their views independently of the views of others is has become the piece is a departure from the international system that you want these parties and the piece has been management problems and wars and then occupation of Iraq lie known to all the world and the United States know the piece well as the lie it is incredible itself and lie others to come back again to say be misled but after what has been achieved the goal of destroying the infrastructure of the States and this is what I did with Iraq. Table 5 Statistical Analysis Com. R R2 AR Beta Sig Co Sig Co Sig Co Sig Co Sig Co Sig Co Sig Co NonSig Co Sig Co Sig Co Sig Co Sig Co Sig Co Sig Co Sig Co Sig Total Sig 8. Conclusions: By reviewing the results borne out of research on the relationship between the inflation rate and the required rate of return found that the relationship is positive and significant meaning that the inflation rate after a clear increase in the rate of return required by the investor and this will change the rate required whenever the change in the rate of inflation, as explained Find the sources of inflation in this research, which regards Iraq research shows that the war and the siege and occupation were the basis of inflation in Iraq, which reflected the effects not only on the economic aspects and variables that inflation is one of its components, and therefore must take this variable into account when initiating the 401

7 selection of the investment opportunity, as required by the concerned authorities in Iraq work in order to provide an attractive investment climate through the development of economic policies that are clear and efficient departments neutral after achieving political stability and security. Acknowledgement Authors thank the University of Kufa- College of economic and administrationauthor H.M. Mohammadthanks the Iraq market of Stock. References: 1. Brealy, A, Richard and Myers, p.72, c, Stewart, Allen, Franklin, principles of corporate finance, Boston, Central Bank of IRAQA,Annual report 3. Copeland, E, Thomas,and Weston, J Fred, shastri,kuldecp, financial theory and corporate policy. Boston,2005 p krugman, paul & wells, robin, macroeconomics, 2ed, P lasher, R, William, Financial management a practical ppp roach, 6ed, Australia, kpp Madura. Jell, international corporate finance, local, Australia, Pp Ross,A,Stephen & westerfield p283 W, Radolph and Jaffe, Te ffry, corporate Finance, teed Boston, Weston, Fred & Copeland, E Thomas, managerial finance Weston, J, fred and Brigham, F, Eugene, Essentials of managerial, finance, 11 ed, new york 1996.p