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The cost of equity capital is the rate of return investors expect to receive from investing...

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Finance

The cost of equity capital is the rate of return investorsexpect to receive from investing in the firm’s stock. There are twoprimary methods for determining the cost of equity. One approach isto use the Dividend Growth Model to determine the required rate ofreturn on the firm’s equity. A second approach is to use theCapital Asset Pricing Model (CAPM) to determine the expected orrequired rate of return for a firm’s stock. Explain which you woulduse and why?

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4.2 Ratings (662 Votes)
I would use both and take the average The DDM with constant growth gives cost of equity as rs D1P0g where P0 is the current price D1 is the next expected dividend and g constant growth rate in dividends The uncertainty in this method is the ascertainment of the growth rate    See Answer
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The cost of equity capital is the rate of return investorsexpect to receive from investing in the firm’s stock. There are twoprimary methods for determining the cost of equity. One approach isto use the Dividend Growth Model to determine the required rate ofreturn on the firm’s equity. A second approach is to use theCapital Asset Pricing Model (CAPM) to determine the expected orrequired rate of return for a firm’s stock. Explain which you woulduse and why?

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