CAPM and the Constant Dividend Growth Model
The Capital Asset Pricing Model (CAPM) is a powerful analytical tool used for calculating the price of common stock. After reflecting on theory and application of the CAPM model and reviewing the prior work on the Constant Dividend Growth Model post a one paragraph response to the following questions.
Question 1 - What are the primary advantages and disadvantages of the Capital Asset Pricing Model (CAPM) compared with the Constant Dividend Growth Model for use in pricing common stock?
Question 2 - Can either or both of these two models be used to price the stock of Gamma Inc., a non-publicly traded company that does not pay dividends? Explain your answer.
Question 3 - Why is it that the financial models for calculating the price of a stock cannot be reliably used to make day to day investment decisions in the stock market?
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$6.90ANSWERTutor has posted answer for $6.90. See answer's preview
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****** *** ******** dividend growth ***** ***** ***** assumes **** *** ******** growth **** ** ***** and ****** ******* ***** ******* ***** (CAPM) ***** **** account the ***** ** systematic risk vis-à-vis *** stock market ** * ************* CAPM ********** ************ **** unlike *** ***** assumes that ***** ***** ** hypersensitive *** that the ******** ****** **** ****** be ****** **** the cost ** ****** (Thomas ***** *** ***** *** ******* ****** ********** thus ****** ** ****** ** ******* different companies whereas **** uses ******** ******* ****** ******* ***** *** ** inaccurate ** ********** ****** ****** ******* ************ CAPM's ******* ********** ** ********* *** ******* ** * ********* rate ***** *** minimum ******** return ********** because ********* ****** ****** or **** ** the **** **** ** *** government ****** *** ******* ********** **** and non-dividend ******* ***** *** ************* ******** *** value ** * **** ***** **** ***** ***** ******* **** ******* ********** ***** ***** ******
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DGM ****** ** used to ***** the stock of ***** *** because *** ******* **** *** *** ********* and *** ****** ** dividend ******** ** estimate ***** ***** **** ** *** ***** hand can ** **** to ***** the stock ** **** ******* but it ***** ******* ************ ** **** **** account ***** ***** ******* **************** risk *** ******** **** ******* ************ ** use **** in **** case would ******* combining ** **** *** ********** ****** ********* ****** ******* ** * ******* **** Gamma's stock is *** ****** thus there *** no **** ****** *** ***** **** ** ******** * discount rate ** *********** *** ***** of ****** **** *** ******* ** ********** ***** default risk ********* **** ** **** *** **** ***** *** lack ** ************ ** ********* held companies **** ** difficult ** accurately value them and **** when ***** **** one *** ** **** ** ******** averages assumptions *** ********* ******* ***** *** ******
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*** ********* models for *********** the ***** ** a ***** cannot ** ******** used ** **** day ** *** investment ********* ** *** ***** market because **** have many shortcomings The ********* ** ***** ****** *** * product ** **** ***** estimates *** assumptions thus *** ***** value one arrives at using these ****** *** ** **** ***** estimates ***** ** ** ******* ***** ********* ***** ** **** ***** situation and using ********* ****** can yield *********** ****** ****** ** ********* ** ****** which result *** should *** ************ ***** ********* models **** ** **** **** ******* ***** ************ ** ***** market prices **** ** investor ********* and the ****** ** **** events ** stock ************ ******* ******* * stock is **** ** *********** ****** ** ** accurate **** *** *** ** *** ********** *************** since ***** *** several other factors **** *** *** to assess ****** deciding ***** ***** ***** their ********** needs ********** ***** ***** ******
References
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* ***** Smart S (2011) ************ ** corporate ******* ****** **** South-Western
******* Learning ******
* & *** * * ****** The ********* ********* ********* techniques from today's
*** ************* ******* *** John ***** & ****