Since equity cash flows are uncertain, the following approaches are used in estimating the cost of equity:

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The most commonly used approaches for estimating the cost of equity are the dividend growth model, risk premiums, and CAPM. Each has its advantages and limitations, and the choice depends on the specific characteristics of the company and the industry. The dividend growth model is simple and straightforward if the company pays dividends, but it may not be appropriate for non-dividend paying companies or those with unstable dividend patterns. Risk premiums are often used in conjunction with the dividend growth model to account for the additional risk involved in holding equity relative to risk-free assets. CAPM is a widely used model that considers both market risk and company-specific risk, but it relies on assumptions that may not hold true in all situations. Overall, a combination of these approaches is often used to arrive at a reasonable estimate of the cost of equity.

Since Equity Cash Flows Are Uncertain, the Following Approaches Are