A discussion on dividend growth models and the capital asset pricing model (CAPM).
Written in 2009; 1,065 words; 1 sources; MLA; $ 37.95
Paper Summary:
This paper talks about dividend growth models, in particular the Gordon Growth model and the assumptions that one needs to take in the calculations. The paper includes the characteristics and limitations of dividend growth models and talks about CAPM, or the capital asset pricing model, which is based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The author compares the two models and explains why the modern portfolio theory is base on CAPM notions.
From the Paper:
"On the other hand, the CAPM is an easy to use and implement model, based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The model has a large applicability, mainly because it does not use dividend estimates for the future and thus works for organizations that do not pay regular dividends, but also because information on the three variables mentioned are usually public and thus one does not need to make additional estimates on the variables used. "
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