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CAPM APT and DDM

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Use of the dividend growth, capm and apt. How accurate are these three models and how realistic are the assumptions of the three models. Which is the best one to estimate the discount rate for Target Corp.

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Dividend growth model relates stock price, dividend, discount rate and growth rate. The model states that price = dividend/(discount rate - growth rate). This one is very easy to use and fairly accurate in the long run (the model calculates intrinsic value in the long run, it says nothing about how stock changes in the short run).

CAPM determines a theoretically appropriate required rate of return of an asset, given the market return and ...

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Similar Posting

Dividend Growth, CAPM or APT

I need help with writing a report explaining the challenge of estimating or coming with a good "feel" for the "cost of equity capital" or the rate of return that you feel your company investors require as the minimum rate of return that they expect of require my company (General Mills) to earn on their investment in the shares of the company. There are several asset pricing models used to estimate the cost of equity capital for this module in the background materials. After reading through the background materials, write a 5 to 6 pages report for the board of directors for General Mills by responding to the following tasks:

Which of the three models (dividend growth, CAPM, or APT) is the best one for estimating the required rate of return (or discount rate) of General Mills company? Based on your analysis and findings, what would you recommend to the board of directors of your SLP company?

In your paper, include discussion of the following issues:

1. Ease of use of these three models

2. Accuracy of each of these three models

3. How realistic the assumptions of each model are

For this paper I need to take a clear stand and pick one of these three models to defend to the Board of Directors. You cannot tell the Board of Directors that "I like all three models," they want you to come to them with a decisive choice of just one model.

Part II

The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using CAPM model is often more difficult than using the dividend discount model. The companies' financial statements do not show the cost of equity.

The following table shows necessary (hypothetical) information to calculate the cost of equity by using CAPM model:

Company Listing RRF RM Ã?j

Nike Inc. NYSE: NKE 0.20% 4.49% 0.79

Sony Corporation NYSE: SNE 0.20% 6.83% 1.98

McDonald's Corporation NYSE: MCD 0.20% 2.94% 0.29

E(rj )= RRF + b(RM - RRF)

E(rj ) - The cost of equity

RRF - Risk free rate of return)

Ã?j - Beta of the security

RM - Return on market portfolio)

Based on the above information, which company has higher cost of equity? Why? Please explain your reasoning in brief.

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