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Describe the Dividend Growth Rate model and the Capital Asset Pricing Model (CAPM) as it 3) relates to Common Stock Pricing.
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As per the Dividend growth model, the price of a stock is the present value of its dividends. This is extended to state that the required return of a stock is the sum of dividend yield and constant dividend growth rate.  

As per CAPM, the required return of a stock = risk free rate + (beta of stock * market risk premium), where market risk premium is the difference between expected return of overall market and the risk free rate.

Advantages of Dividend growth model

  • Relatively easy to compute
  • It can be used to solve for stock price given the required return, or to solve for required return given the stock price.

Disadvantages of Dividend growth model

  • Cannot be applied to a non-dividend paying stock
  • Highly sensitive to small changes in inputs
  • Cannot be applied where the dividend does not follow a linear pattern

Advantages of CAPM

  • Eliminates unsystematic risk from the equation since unsystematic risk can be diversified away.
  • It is validated by empirical research
  • Considers systematic risk relative to the market

Disadvantages of CAPM

  • Estimating market risk premium and beta can be complex.
  • The risk-free rate may change over time
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