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Compare and contrast the Dividend Discount Model and the Security Market Line approaches to estimating the...

  1. Compare and contrast the Dividend Discount Model and the Security Market Line approaches to estimating the cost of equity.

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Expert Solution

Security market line approach to estimating the cost of equity involves calculation of the cost of equity using Capital asset pricing method.

the dividend discount model based upon the valuation of the overall companies price based upon the future value of the dividend while CAPM model is based upon the calculation of expected rate of return and market premium using beta.

One should be using dividend discount model after estimating of growth trajectory and the past performance of dividend but same is not needed in case of Capital asset pricing method.

dividend discount model cannot be used with stocks that doesnot offer Dividend but Capital asset pricing Method can be used with stocks which offer or does not offer dividend.

Dividend discount model is not that widely used as the Capital asset pricing method as dividend discount model is a narrower approach and Capital asset pricing method is wider approach.

jeff jeffy answered 1 year ago
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