Q. Estimate cost of equity using dividend valuation model?
The cost of equity may be approximate using either the dividend valuation model or the capital asset pricing model. In theory the two models must provide the same estimate of the cost of equity. In several instances because of market imperfections and problems in the estimation of an appropriate growth rate in the dividend valuation model the two models often give different results. CAPM is usually considered to be the better alternative. However this model as well has theoretical weaknesses and there may be problems in obtaining data to input into the model.