Capm

DIVIDEND GROWTH, CAPM OR APT

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

Discussion of the following issues:

1. Ease of use of these three models

2. Accuracy of each of these three models

3. How realistic the assumptions of each model are

Pick one of these three models to defend to the Board of Directors.

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. 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 capital asset pricing model (CAPM) assumes that cost of equity is influenced simply the risk (beta) of a firms stock. The model predicts cost of equity as being affected by both the risk-free rate and the return on a market portfolio.

The arbitrage pricing theory (APT) assumes that cost of equity is influenced by more than one factor in contrast to what is specified under CAPM. APT determines equity cost by analyzing the different factors that may have a measurable impact on a firm’s shares. These factors could include market sensitivity to the firms stocks, unique events associated with the stock, state of the economy etc.

Overall the dividend growth model is the simplest to calculate since its input variables can be easily obtained. However the APT is the most superior tool because of the numerous factors in the model.

Part II

The following table shows necessary (hypothetical) information to calculate the cost of equity by using CAPM model:

|Company listing |Ticker |RRF |RM |Bj |

|FedEx Corporation |NYSE: FDX |1%...