As a means of determining a ﬁrm's cost of equity ﬁnancing for an investment, a weakness in the
dividend growth model is that it fails to speciﬁcally address the risk level of the investment.

Question

Quizplus · Accepted Answer

The dividend growth model only considers the expected future dividend payouts and assumes they will grow at a constant rate, without taking into account the risk level of the investment. Therefore, it fails to provide a comprehensive measure of the cost of equity financing that is adjusted for the investment's risk profile.

As a Means of Determining a ﬁRm's Cost of Equity