The dividend model requires us to discount future dividends.  What makes this tricky is that we know that future dividends are uncertain, so we are really discounting expected dividends.  We cannot simply use Treasury rates, these would only be appropriate if there was no uncertainty about dividends.  Models have been developed to produce risk-adjusted discount rates that are used to discount expected dividends.  One such model is the CAPM.

The CAPM, derived by Sharpe (1964) and Lintner (1965) provides the following discount rate:

Here, k_e is the discount rate,  r_f is the risk free interest rate, b is the stock’s beta (i.e., sensitivity to overall market movements), and E(R_M) is the expected return from the market as a whole.  The term inside the brackets, E(R_M)-r_f is called the equity premium, and the equity premium measures the excess return from investing in stocks over the risk free bond. K_e is also called the expected return of the stock.

This implies that k_e is a function of three inputs, the risk free rate (usually taken to be the yield on Treasury notes and bonds), the stock’s beta, and the equity premium.  The next example shows where you can find values for these inputs.