Outcomes of CAPM
The CAPM as presented by Fama and French is the only model that can effectively be used to peredict required rate of return on securities keeping in view the risk free rate and market rate of return. The model is widely and reliably used by finance persons all over the world but there still exist many sorts of deficiencies in the model that are contributiong to limit its scope regarding its applications. The returns that are utilized in the model are assumed to be normally distributed but practically returns are not distributed normally. Another assumption of the model that shareholders have equal know how of the information prevailing in the market. In addition to this another strict assumption of the model limits its scope that is of probability beliefs of all the active and potential shareholders that it is exactly matching the true distribution of returns. The variation of stock returns is also not explained by the model effectively that challenges its application in many real world cases.
It can be said that firm’s decision regarding dividend depends on the level of retained earnings that are possessed by the firm. In addition to this it also depends on the fact that whether it has available opportunities for investment out of retained earnings or not.
There are many issues with Gordon Model regarding the unrealistic assumptions underlying the model. The assumption that it makes regarding no internal financing is impossible to be followed by the real world scenario. In addition to this it is extremely hard to find r and Ke because the risks faced by the firm kept on changing along with the investments made by the company Sharpe et al, 1999). Another potential issue with the model is that it cannot be used in case of firm having supernormal growth rates because this model can only be applied in case of firm having slow and stable rate of growths.