In calculating the cost of common stock equity, the model having the stronger theoretical foundation is
A) the constant growth model.
B) the capital asset pricing model.
C) the variable growth model.
D) the Gordon model.

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) has a stronger theoretical foundation as it takes into account the risk of an investment by considering the expected return of the market and the specific risk of the stock. The constant growth model (also known as the Gordon model) only considers the expected growth rate of dividends and does not account for risk, while the variable growth model has limitations in its assumptions about future growth rates.

In Calculating the Cost of Common Stock Equity, the Model