The constant growth model may be used to estimate the risk premium component of the cost of equity as an alternative to relying on historical information as is done in the capital asset pricing model.

Question

Quizplus · Accepted Answer

The constant growth model can be used to estimate the expected future dividend and combine it with an investor's required rate of return to calculate the cost of equity and the risk premium component. This allows for a forward-looking approach instead of relying solely on historical data as in the capital asset pricing model.

The Constant Growth Model May Be Used to Estimate the Risk