CAPM vs. DDM vs. APT

The cost of equity capital and the CAPM

Part I

Don't use plagiarized sources. Get Your Custom Essay on
CAPM vs. DDM vs. APT
From $10/Page
Order Essay

The cost of equity capital for a company is the rate of return on investment required by the company’s shareholders. The rate of return consists of both the dividends and capital gains (e.g., an increase in the share price). The rates of return are expected future returns, not historical returns. Therefore, the returns on equity can be expressed as the anticipated dividends on the shares every year in perpetuity. Thus, the cost of equity is the cost of capital which will equate the current market price of the share with the discounted value of all future dividends in perpetuity.

To complete Part I, please review the background material on the capital asset pricing model, the material on the dividend growth model, and arbitrage pricing theory. These models provide some insights and tools to estimate the rate of return that investors in our company â??requireâ? in the sense that if they don’t see the possibility that they will earn that rate of return they will sell the shares and that of course will lower the market price per share.

These models use a set of assumptions that are not necessarily tenable.

You are asked by your board of directors to explain the challenge of estimating or coming with a good â??feelâ? for the “cost of equity capital” or the rate of return that you feel Under Armour investors require as the minimum rate of return that they expect of require Under Armour to earn on their investment in the shares of the company.

A report for the board of directors on 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 JetBlue Airlines? Based on your analysis and findings, what would you recommend to the board of directors of JetBlue Airlines?

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

Part II

The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using CAPM model is often more difficult than using the dividend discount model. The companiesâ?? financial statements do not show the cost of equity.

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


Nike Inc.

Sony Corporation

McDonaldâ??s Corporation

E(rj )= RRF + b(RM – RRF)

E(rj ) – The cost of equity

RRF – Risk free rate of return)

Ã?j – Beta of the security

RM – Return on market portfolio)

Based on the above information, which company has higher cost of equity? Why?


Solution Preview
Hello, please find the attached document for a better formatted solution.

The Capital Asset Pricing Model (CAPM) best serves the function of determining the cost of equity Nike Inc, Sony Corporation, or McDonalds. Using CAPM calculations, at $6.58 per share, JetBlue’s target security price for October 2011 is $7.46. If this security price becomes unrealistic within the year, then options to boost investor return through a dividend should be explored. (What better time than the New Year to revise expectations for the coming year?) While less accurate than arbitrage pricing theory (APT) and dividend growth models, CAPM’s ease of use, and the isolation of Beta assumptions into a single variable best fit the current state of JetBlue’s enterprise.

SPECFIC COMPANY COST OF EQUITY (Using Hypothetical Return Rates)
CAPM would calculate Nike’s current cost of equity at 4.176%:
RE= RF + Beta(RM – RF)
RE= 1.00% + 0.91(4.49%-1.00%)
RE= 4.176%

This calculation is based on a variable market rate of return given as 4.49% and a risk free rate of 1.0%. Using a variable market rate of return may be appropriate in comparing companies assuming the market rate is risk-adjusted.

CAPM would calculate Sony’s current cost of equity at 9.628%:
RE= RF + Beta(RM – RF)
RE= 1.00% + 1.48(6.83%-1.00%)
RE= 9.628%

CAPM would calculate McDonald Corporation current cost of equity at 1.698%:
RE= RF + Beta(RM – RF)
RE= 1.00% + 0.36(2.94%-1.00%)
RE= 1.698%

Expanding the above calculation from left to right, each variable introduces new assumptions, and becomes progressively more contentious. RF comprises the risk-free rate. In this case, the US Prime Rate is used (Wall Street Journal, 2010). While traditionally, RF would use a “zero coupon government bond matching the time horizon of the cash flow being analyzed,” the time horizon for our consideration is flexible, (Damodaran). Instead, the Prime Rate captures current aggregate market conditions and while admittedly it is an “index, not a law,” it closely matches various government treasury bonds, considers current inflation risk, and is a function of the Federal Open Market Committee’s target rate for federal funds (Wall Street Journal, 2010).

Next, and more contentious than RF, is Beta. Beta represents a “statistical analysis of past price movments of an individual stock (against) the market as a whole,” (Arman, J. & Biger, N. , (2008). In this calculation, 1.5 was used (NASDAQ, 2010). While Beta is purported to be a mathematical truth, the assumptions underpinning the concept are extremely fluid. Inevitable variation between Beta values exists due to how each defined the “market as a whole.” Just to …

Solution Summary
5 pages in APA format with references.

To continue with the answer check on

Order NOW For A 35% Discount!
Pages (550 words)
Approximate price: -

Why Choose Us

Quality Homework Writing

Do you need to ace your test? We have qualified writers to assist you in writing 100% quality homework writing. Mycoursewriter offers students unique and personalized custom papers that help them in getting good grades. Our academic experts will assist you with your dissertation papers, thesis writing, research papers, term papers, and case study homework help. Our writers are experienced and have perfected the art of crafting the best essay writing papers regardless of your academic level. Order now and get our superb homework writing services.

Expert Academic Writers

A student needs professional assistance outside class time. Before hiring our writers, they undergo thorough tests and strict educational backgrounds. After passing a test, our writers undergo training to ensure they deliver expert professional papers to our customers. We ensure they meet the timely delivery of papers and follow our customers' provided instructions. Every writer is an ENL writer and is from the USA, Canada, UK, or Australia. Our experts approach papers effectively depending on their area of specialization.

Affordable Price Guarantees

Is the deal too good to be true? Mycoursewriter is the most affordable assignment help website on the market. We consider students' daily needs for academic help. Our paper costs are reasonably priced to approximately 90% of students around the globe. Our main aim is to ensure students achieve academic excellence, and we believe inconsiderable prices should not hinder students from getting quality homework writing help. In case of any dissatisfaction, we offer unlimited revisions and rewrites without extra charges.

Timely delivery of papers

Tight deadline? Is your paper due in the next few hours? Worry no more. Our writers are here for your rescue. Many college students find it hard to balance their social and academic life and get caught up with academic deadlines. Drafting your paper at the last minute does not allow you to conduct extensive research and craft the correct answers. We have expert writers ready to work on your assignment writing. Urgent writing services are the ultimate solutions you need. We guarantee you timely delivery of papers at your convenience and specified time delivery of the customer.

100% Original Tasks

The ultimate deal-breaker in achieving good grades is submitting imitative papers. Plagiarism is a breach of examination standards and has serious consequences. Students need to deliver papers written in their understanding by paraphrasing their research findings and relevant citations. Our expert's primary consideration is providing free plagiarized papers that meet the lecturers' requirements. Our editors will proofread your paper before delivery ad ensure your papers will not be substandard. We guarantee extreme originality, and in case of any customer concerns, we offer a plagiarism report.

All Round the clock Customer Support

Our website is user-friendly and super useful! Mycoursewriter is the most trusted online writing website always available to provide you with assignment writing services that you need. Our primary concern is meeting customer need specifications by our friendly customer support team that Is available all the time. Our website usability is self-learnable but in case of any problem, feel free to contact us directly through our website email: We have diligently satisfied thousands of students, and you can witness this on our sites' review page.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Advantages of Using Our Assignment writing Services

Mycoursewriter welcomes you for superb essay writing services. We are a legit site offering help with your most challenging homework writing assignments at affordable prices. Your essay paper will be assigned to a professional writer who will craft the paper from scratch according to your provided instructions.


Essay Writing and Proofreading Services

Essay writing is a common assignment writing for most college students. It takes a lot of time to craft a complete perfect essay. Mycourserwiter offers the best essay writing and proofreading services for most college students. Your paper is assigned to an expert writer who does thorough research on fresh ideas and personalizes your essay paper according to your assignment writing guidelines. Our essays are entirely exceptional and undergo a strict procedure that includes papers free from plagiarism and thorough proofreading.


Admission and Business Papers

Writing an admission paper is not every student's desire, and this should not hinder any student from earning an admission. Writing a perfect personal statement to earn a position in a dream school or job can be stressful. Personal statements should display a high level of confidence and uniqueness. Admission essays require you to have a vast knowledge of the current happenings in the world and knowhow of the business world. We have qualified writers with skills who will write your admission paper through comprehensive research. All you have to do is provide us with little details about yourself, instructions and our writers will craft a perfect paper for you.


Editing and Proofreading

Mycoursewriter offers you assignment writing services free from grammatical and formatting mistakes. An error-free paper is significant in scoring the desired maximum grades. We have a team of editors who will go through your paper after our expert writers have delivered their fully crafted papers. Our writers will cover all the aspects of your paper instructions, such as fonts, spacing, and educational formats. Our team of editors will check through your paper to make sure it meets the formatting style provided in the paper instructions. Under no circumstances will a poorly formatted paper will be forwarded to you as our team of editors will ensure careful proofreading.


Technical Papers

Assignment writing is part of a learning process, and one may not have the knowledge to answer all questions correctly. This should not be a stress to you as we have qualified essay writing experts to help you. Our qualified writers are holders of PhDs, Degrees, and Masters in different areas of study and can handle any papers regardless of the complexity. Multiple assignments may be challenging to finish on time. Our skilled professional writers are here to assist you in crafting all the correct answers for your assignment. Stop stressing about your homework writing and place an order with us, and our expert writers will provide you with the best assignment help.