Dividend growth model and Dollar: Difference between pages

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''Equity valuation and cost of capital''
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(DGM).  
Dollar is a widely used name for the currencies of many different countries including Australia, Canada, New Zealand, Trinidad and Tobago, Taiwan, the United States and Zimbabwe.


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.


2.


==Applications of the DGM==
The United States dollar (USD).


Common applications of the dividend growth model include:


(1) Estimating the market <u>cost of equity</u> from the current share price; and
==See also==
*[[Australia]]
*[[Canada]]
*[[Taiwan]]
*[[United States]]


(2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.
[[Category:The_business_context]]
 
[[Category:Financial_products_and_markets]]
 
==DGM formulae==
 
The DGM is commonly expressed as a formula in two different forms:
 
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 ==
* [[Cost of equity]]
* [[Corporate finance]]
* [[Ex dividend]]
* [[Perpetuity]]
 
 
==Student article==
[[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer]]
 
''Real rates of corporate decline often lead to miscalculation, overpaying for acquisitions and disastrous losses.''
 
''This article shows how to avoid the most common errors, save money and earn valuable exam marks.''
 
[[Category:Corporate_finance]]

Revision as of 16:28, 8 December 2019

1.

Dollar is a widely used name for the currencies of many different countries including Australia, Canada, New Zealand, Trinidad and Tobago, Taiwan, the United States and Zimbabwe.


2.

The United States dollar (USD).


See also