There are several models in use to evaluate firm's cost of capital. The cost of capital represents the cost to the firm to acquire money. Therefore, any investment the firm makes must generate a return greater than that cost. If the investment does not, then shareholder wealth will be eroded. Moreover, investor capital represents an opportunity cost. Therefore, if a certain amount of wealth is not generated from the investments, the investors would be better off investing elsewhere. This measure, variously termed the hurdle rate or the discount rate, can be determined using one of the various models. This report shall investigate three of those models – the capital asset pricing model (CAPM), the dividend discount model (DDM) and arbitrage pricing theory (APT). This report will analyze the relative strengths and weaknesses of each of these models in order to determine which one is the most appropriate for FedEx.
             The first model to examine is the dividend discount model. The dividend discount model is shareholder-centric in that it seeks to provide insight into a company's stock value by way of analyzing its dividends. This makes it appropriate mainly as a hurdle rate, measuring the opportunity cost for shareholders, rather than as an internal discount rate. The dividend discount model can be used, however, to derive the rate because it uses the hurdle rate as part of the equation. The other variables in the equation are the stock price, the current dividend and the dividend growth rate.
             One of the main advantages of using the dividend discount model is that it is easy to use. All of the variables are easy to acquire, at least in a rough form. One of the most important disadvantages to using this model, however, is that it is laden with assumptions. The dividend growth rate, for example, must be estimated. There are many ways to do this, but for the most part they all involve extrapolating past data ...