IntroductionLong-term financing strategies help ensure that money invested today will earn more than or equal to the amount invested. The capital asset pricing model (CAPM) and the discounted cash flow method (DCF) will be compared. The mix of debt and equity helps a company optimize its wealth. The mix of debt and equity will be examined, along with financial market characteristics and debt and equity instruments. Finally, long-term financial alternatives such as stocks, bonds, and leasing are discussed. Capital asset pricing model versus the discounted cash flow method. You can use two methods to calculate the required return on common stock. The first method is the capital asset pricing model, or CAPM. In the CAPM, the required return on common stocks is achieved by adding the risk-free rate of return to the historical validity of the return. Historical return validity is calculated by subtracting the market return from the risk-free rate of return. The discounted cash flow method, or DCF, "uses future projections of free cash flows and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to value the investment potential,” (Investopedia, 2007). A good opportunity exists when the investment potential is greater than the current cost. The DCF method is used to take into account the time value of money, meaning that the value of a dollar today will be worth less in the future, all other things being equal. The following graphic shows how the two methods are calculated and what disadvantages may exist. Description Formula Disadvantages Capital Asset Pricing Model (CAPM) “The CAPM relates the risk-return trade-offs of individual assets to market returns” (Block & Hirt, 2005) . Kj =  + Km + e• Kj = Return on a company's individual ordinary shares•  = Alpha, the y-intercept•  = Beta, the coefficient• Km = Stock market return (an index of stock returns used, usually the Standard & Poor's 500 Index) • e = Error term of the regression equation The CAPM does not easily measure all types of assets. Discounted Cash Flow (DCF) Method DCF uses future cash flow and discounts it to obtain the present value. CF1 CF2 CFnDCF = -------- + -------- + …------(1 + r)1 (1 + r)2 (1 + r)n