Use of the Capital Asset Pricing Model (CAPM) in measuring the cost of ordinary equity differs from the constant dividend growth valuation model in that it directly considers the firm's risk as reflected by beta.

Question

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The CAPM takes into account a firm's risk, as measured by beta, when calculating the cost of equity. In contrast, the constant dividend growth model does not directly consider a firm's risk, but instead relies on the assumption of a constant growth rate for dividends.

Use of the Capital Asset Pricing Model (CAPM) in Measuring