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Essay / Research Paper Abstract
This 6 page paper is written in two parts. The first part looks at three investment models; dividend discount model, (DDM), arbitrage pricing theory (APT) and capital asset pricing model (CAPM) discussing each in order to ass which may be best for a firm to use in determining the rate of return they should be creating for shareholders. The second part of the paper presents some CAPM calculation and discusses why some firms may have higher costs of equity. The bibliography cites 6 sources.
Page Count:
6 pages (~225 words per page)
File: TS65_TEaptddmcapm.doc
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Unformatted sample text from the term paper:
it is necessary for management to understand what the shareholders want and expect. Invariably, the majorly of shareholders in the majority of companies are investing to gain a return on
their investment. The return may be in terms of dividends paid and the capital growth that may be archived by the share. If management of a firm wish to ensure
they are meeting shareholder expectations they need to have a basic understanding of the returns shareholders may be expecting. There have been a number of different models developed which may
be used; however, they each tend to give differing results which can be highly divergent. If Google which to use a model to estimate the expected returns they need to
understand the models and assess which may be the most accurate or viable. There are three models that are commonly use, these are the dividend discount model, (DDM), secondly
there is arbitrage pricing theory (APT) and finally there is capital asset pricing model (CAPM). To determine which is best each may be assessed and a comparison made. The
first of these is the DDM, the underlying concept is that the value of an investment should reflect the returns that the investment will provide. This is not undertaken by
speculating the future value of the share, but assessing the cash generated. It is referred to as the dividend discount model as it is taking the future earnings of the
firm (which theoretically should become dividends at some point) and discounting them into todays value (Howells and Bain, 2007). This is a model that can be used for any share,
including Google, but is most commonly used to assess required returns for firms that are making regular dividend payments. The inputs for this model are dividends which are expected in
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