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Essay / Research Paper Abstract
This 5 page paper looks at three models which may be used to assess the cost of equity, the Capital Asset Pricing Model (CAPM), arbitrage pricing theory (APT) and the dividend discount model (DDM) which is a dividend growth model. Each of the models is outlined, ease of uses, assumption and accuracy are all considered. The paper ends by making a recommendation on the beat model for a company to use when assessing their own cost of equity. The bibliography cites 4 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEmodCoE.doc
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Unformatted sample text from the term paper:
not a fixed payment and the equity is often perceived as a cost effective way of raising capital. However, investors that purchase the shares and provide the equity expect a
return on that investment. For a firm such as Target Corp., this is necessary not only in terms of capital management but also to understand the level of return
that investors will expect on their equity. There has been the development of different models which can be used as ways of assessing the required return on equity. Models which
may be used include the Capital Asset Pricing Model (CAPM), arbitrage pricing theory (APT) and the dividend discount model which is a dividend growth model. If all these models it
may be argued that for Target, with their knowledge of their own firm and the need to calculate a specific cost of equity the dividend discount model is most appreciate,
able to be adapted to the firms own situation. However, it should be noted that no single model has been proven to be more accurate than any other. To
appreciate how and why would recommend the discount dividend it is necessary to look at the alternative models along with there potential accuracy as well as ease-of-use. The capital asset
pricing model was developed as an extension to modern portfolio theory, expanding on the basic ideas to facilitate an allowance for both specific and systematic risks, and as such allow
for the calculation that an investor would require to compensate for both these types of risk. Systematic risk can be diversified by an investor by spreading risk though investing in
different stocks and shares. The risk is assessed using the beta, which is a measure of the volatility of the share price movements (Howells and Bain, 2007). The higher the
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