531 Words2 Pages

There are a few different inputs into the dividend growth model. P0 is the price of the company's stock today. This factors into the model because the price of the stock in this model is taken to be the value of the discounted future cash flows. Those cash flows come entirely from dividends in this model. Thus, the higher the price, the greater the value of those future cash flows. The higher the price, the lower the cost of capital for the company.
D1 is the current dividend. This is the present cash flow that will be extrapolated out into the future. The higher the current dividend, the higher the rate of return on the equity. The g is the growth rate of the dividend. The higher the growth rate of the dividends, the higher the rate of return will be. As we know, the higher the risk of the cash flows (the discount rate), the less likely the project will have a positive NPV and thus the less likely the project will be accepted.
A higher Re, or discount rate, the riskier the project will need to be in order to be accepted, because a higher discount rate implies that for the company the opportunity cost of capital is higher (riskier). A higher stock price implies that the company is less risky. Yet, the higher the current dividend or the dividend growth rate, the riskier the company will be.
The security market line approach (aka CAPM) is another method of determining the firm's cost of equity. The SML equation is as follows:
Source: PowerPoint
The risk free

Related

## Dividend Theory And Growth Model

1177 Words | 5 PagesDividend is that part of earning which is distributed among the shareholders. The decisions about when and how much earnings should be paid as dividends is part of the firm 's dividend policy. It is irrefutable that dividend policy is controversial issue as some people opine that dividends are relevant for the valuation of company and others think that dividend does not effect the market price of shares and valuation of firm. Besides this, the market where long term investment like share bonds are

## The Gordon Model

1199 Words | 5 PagesCoursework Assignment Number 1 The Gordon Model is particularly useful since it includes the ability to price in the growth rate of dividends over the long term. It is important to remember that the price result of the Constant Dividend Growth Model assumes that the growth rate of the dividends over time will remain constant. This is a difficult assumption to accept in real life conditions, but knowing that the result is dependent on the growth rate allows us to conduct sensitivity analysis to

## Advantages And Disadvantages Of The Dividends Discount Model

899 Words | 4 PagesIn this paper, a study on the Dividends Discount Model (DDM) will be explored and explained. The four main topics that this essay will be based around include what two common share valuation techniques are used, the dividend discount model and the use of a multiples approach, a discussion on the relative advantages and disadvantages of dividend discount model and a look into which model would produce the most accurate results and Why? With the relevant content, research, and analysis of these specific

## The Cost Of Equity And Capital Asset Pricing Model

851 Words | 4 Pageselements, the prospective dividend yield and the expected rate of growth in dividend (Pike et al., 2012). There are two ways to calculate the cost of equity which are Dividend Growth Model and Capital Asset Pricing Model (CAPM). Dividend Growth Model is a valuation method which takes into consideration dividend per share and its expected growth. This model assumes that dividends will be constant or growing at a fixed rate in perpetuity. On the other hand, Capital Asset Pricing Model explains how individual

## Wal Mart : An Investment Advisor Of A Brokerage Firm

1072 Words | 5 Pagesincluding perpetual dividend growth model, dividends and a terminal value, the three-stage approach, price/earnings approach, and capital asset pricing model. A. Perpetual Dividend Growth Model The current value of Wal-Mart stock is the discounted value of all future expected dividends at the required expected rate of return. The constant growth dividend discount model must be used in order to facilitate the estimation process. According to the constant growth dividend discount model, the current price

## Gordon's Theory Of Dividend Policy

1464 Words | 6 PagesChartered Accountant of India, dividend is defined as “a distribution to shareholders out of profits or reserves available for this purpose”. The financial manager must take careful decisions on how the profit should be distributed among shareholders. It is very important and crucial part of the business concern, because these decisions are directly related with the value of the business concern and shareholder’s wealth. Like financing decision and investment decision, dividend decision is also a major

## Starting Off With The Gordon Growth Model

1500 Words | 6 Pagesthe Gordon Growth Model was developed by Professor Myron Gordon of the University of Toronto. It explains that if any investor is aware of the dividends handed out in a year by any company, and at what rate that dividend will grow, the investor is able to determine the actual value of the stock, which describes what the investor should pay at most for the selected stock issued by the company. (Ozyasar, 2015) The Gordon Growth models inputs are relatively easy to determine. The dividends can be found

## Woolworths Ltd (WOW) Valuation Report

1740 Words | 7 PagesHistorical data is utilised with the Retention Growth Model to estimate the expected perpetual semi-annual growth rate of the company’s dividends. The Capital Asset Pricing Model is used to estimate the required rate of return for this company and the current expected share price is calculated using the Constant Dividend Growth Model. All data can be found in the appendices. The results of the analysis show that the WOW stock is undergoing rapid growth and is currently under-priced. The findings suggest

## Valuation Of Common Stock

804 Words | 4 PagesBecause common stock never matures, today’s value is the present value of an infinite stream of cash flows (i.e., dividend). • But dividends are not fixed. • Not knowing the amount of the dividends—or even if there will be future dividends— makes it difficult to determine the value of common stock. • So what are we to do? Valuation Models • Dividend Valuation Model (DVM): – Constant dividend: Let D be the constant DPS: The required rate of return (re) is the return shareholders demand to compensate

## Cost of Capital Using Discounted Cash Flow Approach

1060 Words | 5 Pagescompany or asset using the concepts of time value of money (Wikipedia, 2004). Three inputs are required to use the DCF, also called dividend-yield-plus-growth-rate approach, include: the current stock price, the current dividend, and the marginal investor’s expected dividend growth rate. The stock price and the dividend are east to obtain, but the expected growth rate is difficult to estimate (Ehrhardt & Brigham, 2011). The advantages and disadvantages of using DCF approach will be explained along

### Dividend Theory And Growth Model

1177 Words | 5 Pages### The Gordon Model

1199 Words | 5 Pages### Advantages And Disadvantages Of The Dividends Discount Model

899 Words | 4 Pages### The Cost Of Equity And Capital Asset Pricing Model

851 Words | 4 Pages### Wal Mart : An Investment Advisor Of A Brokerage Firm

1072 Words | 5 Pages### Gordon's Theory Of Dividend Policy

1464 Words | 6 Pages### Starting Off With The Gordon Growth Model

1500 Words | 6 Pages### Woolworths Ltd (WOW) Valuation Report

1740 Words | 7 Pages### Valuation Of Common Stock

804 Words | 4 Pages### Cost of Capital Using Discounted Cash Flow Approach

1060 Words | 5 Pages