Which of the following equations correctly illustrates the calculation of the cost of equity using the Dividend-Yield-plus-Growth-Rate approach?
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A. B. C. D. E. F.Explanation
The Dividend-Yield-plus-Growth-Rate approach calls for the following components: next annual dividend, current stock price, and expected growth rate. This approach, also known as the Discounted Cash Flow (DCF) method, is a flexible and very adept tool in the hands of the financial analyst, and is it is imperative that the CFA candidate fully understand both the applications and the methodology of this approach. The first choice illustrates the Capital Asset Pricing Model, while the second represents an approach for calculating sustainable growth rate. The remaining answers are somewhat fictitious.