Dividend Growth, Capm or Apt, the Best One for Estimating the Required Rate of Return (or Discount Rate).

Which of the three models (dividend growth, CAPM or APT) is the best one for estimating the required rate of return (or discount rate) of the company?

We all want a raise each year from our employer. The same should be true for the companies we invest in. One of the most important aspects of a dividend stock is its ability to consistency raise dividends over time. I would suggest to the board of “Visa” that I prefer the dividend growth model because it’s easy to use. All else the same, the higher the expected earnings growth rate, the higher the current price per share. While APT may be more specific, it’s very difficult to find out all the factors affecting the return derived from the asset and this makes APT more complicated. The difference is that where CAPM defines the only risk as being the Beta to the market, APT let’s us define just about any risk we want. On the other hand CAPM can be derived easily by knowing the market rate of return, risk free rate of return and the systematic risk of the similar asset in the market. But easy, may not necessarily be the most accurate. After reviewing each of the models, there are clear advantages and disadvantages to each of them.

"It is better to be roughly right than precisely wrong."

- John Maynard Keynes

The ease and accuracy of each model

The dividend growth model assumes that the cost of equity, of any stock, is solely determined by the share market price and future growth rate of dividends. (Wikipedia) It allows significant flexibility when estimating future dividend receipts. Investors are able to suit their model to their expectations rather than force-fit assumptions into the model. The model is relatively simple and easy to calculate but its results are not always highly accurate. This is primarily because the model makes many assumptions about future growth rates. The dividend growth model indicates that earnings growth affects the current price of a share of stock. One downside...