The Dividend Growth Model and Capital Asset Pricing Model Assignment

The Dividend Growth Model and Capital Asset Pricing Model - Assignment poserThis paper illust grazes that the CAPM feign can be used to calculate the possibilities of the growth of investment. CAPM takes into account the risk winding in the marketplace as well as the risk bored by the company that issued the stock. Dividend-growth amaze is a archetype that is used in the valuation of a companys stock. Essentially, the Dividend growth model is a model of stock valuation that primarily deals with the dividends and their consequent growth discounted to present day. The models are shared out into two as Gordon growth model commonly referred to as the dividend discount model is a method that is used to calculate the intrinsic value of stocks. However, the model is based on the assumption that the dividend growth rate is constant. The formula employed by this model is as follows Multi-stage dividend discount model is a dividend growth model that can take any pattern of the future ex pect dividends that is to mean that dividends are not expected to grow at a constant rate. The investor is therefore expected to evaluate dividends separately for each yr while putting into consideration each years expected dividend growth rate. This model is granted by the formula Capital asset pricing model or CAPM is a model that specifies the affinity between risk and need rate of return on assets held by an investor in a well-diversified portfolio. The required rate of return obtained using the CAPM formula is used as the cost of equity of the company. The model has some(prenominal) basic assumptions first, investors are assumed to be rational in the sense that they choose among alternative portfolios on the basis of the expected return and standard deviation of the portfolio held. Secondly, CAPM model also assumes that investors have homogeneous expectations with affect to asset return.