imported>Doug Williamson |
imported>Doug Williamson |
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| (DGM).
| | ''Financial reporting - impairment of financial assets - IFRS 9'' |
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| 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.
| | (ECL). |
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| Its most common uses are:
| | Expected credit loss is a calculation of the present value of the amount expected to be lost on a financial asset, for financial reporting purposes. |
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| (1) Estimating the market <u>cost of equity</u> from the current share price; and
| | It is calculated as: |
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| (2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.
| | ECL = PD x EAD x LGD x Discount Factor |
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| Expressed as a formula:
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| Ke = D<sub>1</sub> / P<sub>0</sub> + g
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| ''OR (rearranging the formula)''
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| P<sub>0</sub> = D<sub>1</sub> / ( Ke - g )
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| Where:
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| P<sub>0</sub> = ex-dividend equity value today.
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| D<sub>1</sub> = expected dividend at Time 1 period hence.
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| Ke = cost of equity per period.
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| g = constant periodic rate of growth in dividend from Time 1 to infinity.
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| This is an application of the general formula for calculating the present value of a growing perpetuity.
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| '''Example 1'''
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| Calculating the market <u>value</u> of equity.
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| Where:
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| D<sub>1</sub> = expected dividend at Time 1 period hence = $10m.
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| Ke = cost of equity per period = 10%.
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| g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%.
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| P<sub>0</sub> = D<sub>1</sub> / ( Ke - g )
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| = 10 / ( 0.10 - 0.02 )
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| = 10 / 0.08
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| = $125m.
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| '''Example 2'''
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| Or alternatively calculating the current market <u>cost of equity</u> using the rearranged formula:
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| Ke = D<sub>1</sub> / P<sub>0</sub> + g
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| Where: | | Where: |
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| D<sub>1</sub> = expected dividend at Time 1 period hence = $10m.
| | ECL = expected credit loss |
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| P<sub>0</sub> = current market value of equity per period = $125m.
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| g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%.
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| Ke = 10 / 125 + 2%
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| = 10%. | | PD = probability of default |
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| | EAD = exposure at default |
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| Also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.
| | LGD = loss given default |
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| | Discount Factor is based on the expected date of default |
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| == See also ==
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| * [[CertFMM]]
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| * [[Cost of equity]]
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| * [[Corporate finance]]
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| * [[Perpetuity]]
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| [[Category:Corporate_finance]] | | ==See also== |
| | *[[Default]] |
| | *[[Discount factor]] |
| | *[[Exposure At Default]] |
| | *[[Financial asset]] |
| | *[[IFRS 9]] |
| | *[[Impairment]] |
| | *[[Loss Given Default]] |
| | *[[Probability of Default]] |
Financial reporting - impairment of financial assets - IFRS 9
(ECL).
Expected credit loss is a calculation of the present value of the amount expected to be lost on a financial asset, for financial reporting purposes.
It is calculated as:
ECL = PD x EAD x LGD x Discount Factor
Where:
ECL = expected credit loss
PD = probability of default
EAD = exposure at default
LGD = loss given default
Discount Factor is based on the expected date of default
See also
