Dividend growth model and Goodwill: Difference between pages

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''Equity valuation and cost of capital''
1. ''Intangible assets - financial reporting.''


(DGM).  
Goodwill is an intangible asset representing the additional premium - in excess of the value of net assets - paid to acquire control of a business.  


The Dividend growth model links the value of a firm’s equity and its market cost of equity, by modelling the expected future dividends receivable by the shareholders as a constantly growing perpetuity.
Also known as positive goodwill.




==Applications of the DGM==
2. ''Financial reporting - consolidated accounts.''


Common applications of the dividend growth model include:
The excess of the total book value of the whole business, above the net value of its individual assets and liabilities.


(1) Estimating the market <u>cost of equity</u> from the current share price; and
Relevant accounting standards include Sections 18, 19 and 27 of FRS 102.


(2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.


3. ''Intangible assets - reputational risk management.''


==DGM formulae==
The positive reputation of a business.


The DGM is commonly expressed as a formula in two different forms:
It can sometimes be estimated as the difference between the market value of a business and its adjusted book value.
 
Ke = (D<sub>1</sub> / P<sub>0</sub>) + g
 
''or (rearranging the formula)''
 
P<sub>0</sub> = D<sub>1</sub> / (Ke - g)
 
 
''Where:''
 
P<sub>0</sub> = ex-dividend equity value today.
 
D<sub>1</sub> = expected future dividend at Time 1 period later.
 
Ke = cost of equity per period.
 
g = constant periodic rate of growth in dividend from Time 1 to infinity.
 
 
This is an application of the general formula for calculating the present value of a growing perpetuity.
 
 
 
<span style="color:#4B0082">'''Example 1: Market value of equity'''</span>
 
Calculating the market <u>value</u> of equity.
 
 
''Where:''
 
D<sub>1</sub> = expected dividend at future Time 1 = $10m.
 
Ke = cost of equity per period = 10%.
 
g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%.
 
 
P<sub>0</sub> = D<sub>1</sub> / (Ke - g)
 
= 10 / (0.10 - 0.02)
 
= 10 / 0.08
 
= $'''125'''m.
 
 
 
<span style="color:#4B0082">'''Example 2: Cost of equity'''</span>
 
Or alternatively calculating the current market <u>cost of equity</u> using the rearranged formula:
 
Ke = (D<sub>1</sub> / P<sub>0</sub>) + g
 
 
Where:
 
D<sub>1</sub> = expected future dividend at Time 1 = $10m.
 
P<sub>0</sub> = current market value of equity, ex-dividend = $125m.
 
g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%.
 
 
Ke = (10 / 125) + 2%
 
= 8% + 2%
 
= '''10%.'''
 
 
The dividend growth model is also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.




== See also ==
== See also ==
* [[Cost of equity]]
* [[Acquisition accounting]]
* [[Corporate finance]]
* [[Book value]]
* [[Ex dividend]]
* [[Consolidated group accounts]]
* [[Perpetuity]]
* [[Financial reporting]]
 
* [[FRS 102]]
 
* [[Goodwill on consolidation]]
==Student article==
* [[Impairment]]
[[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer]]
* [[Intangible assets]]
* [[Market value]]
* [[Negative goodwill]]
* [[Net assets]]
* [[Reputational risk]]
* [[Research & development]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]

Revision as of 05:15, 17 January 2022

1. Intangible assets - financial reporting.

Goodwill is an intangible asset representing the additional premium - in excess of the value of net assets - paid to acquire control of a business.

Also known as positive goodwill.


2. Financial reporting - consolidated accounts.

The excess of the total book value of the whole business, above the net value of its individual assets and liabilities.

Relevant accounting standards include Sections 18, 19 and 27 of FRS 102.


3. Intangible assets - reputational risk management.

The positive reputation of a business.

It can sometimes be estimated as the difference between the market value of a business and its adjusted book value.


See also

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