The main emphasis of this calculation is to have the student calculate the cost of equity capital ([r.sub.e]) using the rearranged dividend growth model
Assuming normally distributed shocks, the likelihood functions for the two models are very similar, with a slight advantage in favor of the nonstationary real dividend growth model
. However, as we show in the next section, the decompositions derived from the VECM/VAR hinge on which variable is assumed to be nonstationary.
Furthermore, if capital gains are induced by retentions, then the dividend versus capital gains split may be viewed as an arbitrary division of earnings, and so an earnings yield model of the cost of equity capital may, under certain circumstances, be equivalent to a dividend growth model
of the cost of equity (Karathanassis, 1983).
(2) The variations of the discounted dividend growth model
used in this literature are rarely more than ad hoc attempts to capture real-world phenomena such as time-varying dividend growth rates.
Other methods, particularly the dividend growth model
, were ignored, as were the possible differences that occur between CAPM and dividend growth.
Among the most widely accepted alternative is the dividend growth model