Economics · Corporate Finance
A company is considering using the Capital Asset Pricing Model (CAPM) instead of the Dividend Growth Model (DGM) to estimate its cost of equity for a new project. Which of the following is a specific theoretical advantage of CAPM over DGM in this context?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1CAPM explicitly incorporates the company's specific dividend policy and historical growth rates into the required return.
- 2CAPM is superior because it considers total risk, whereas DGM only considers the risk associated with future dividend fluctuations.
- 3CAPM allows for the calculation of a project-specific cost of equity by adjusting for the systematic risk of the business activity.✓
- 4CAPM provides a more accurate result because it uses the risk-free rate of return, which is a constant and certain value in the real world.
Correct answer
CAPM allows for the calculation of a project-specific cost of equity by adjusting for the systematic risk of the business activity.
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