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What determines whether to use the dividend growth model approach or the CAPM approach to calculate...

What determines whether to use the dividend growth model approach or the CAPM approach to calculate the cost of equity?

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Answer #1

CAPM model is used when the company doesnt declare dividends for longer periods of time.It is a better and complex method because it utilises risk free return , variance of marke return (volatilty )and includes systematic risk.
It is easy to identify returns and beta of similar industries based on CAPM model.
Return on equity of investor = cost of equity to company (issuer of security)
CAPM model Return on Equity = risk free return + beta * market risk premium.

Dividend growth model can be used where the company declares and provides dividends regularly. However higher dicidend payout ratio can lead to lower retention ratio and lower growth. I can be used to used to determine returns of similar industries as dividedn payout is different even wthin same industry.
Best of Luck God Bless


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