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 following table shows necessary (hypothetical) information to calculate the cost of equity by using CAPM model:
Company Listing RRF RM Ã?j
FedEx Corporation NYSE: FDX 1% 4.50% 1.26
McDonaldâ??s Corporation NYSE: MCD 1% 4.25% 0.43
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? Please explain your reasoning in brief.