Question

Shortcomings of the dividend pricing models suggest that we need a pricing model that is more...

Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects?

The company's risk

The premium for taking on risk

Stable dividends

The reward for waiting

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Answer #1

Option c .is correct option Stable Dividends is not one of these aspects. Because CAPM model is better than dividend discount model. As per CAPM Required Rate = Risk Free rate + Beta * Market risk premium. Hence it is not dependent on the stability of dividends .

CAPM model takes into consideration company's risk and premium for taking on risk. Unlike dividend payout where investors prefer dividends to capital gains according to capm model reward of waiting is there.

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