Dividend growth model and Enterprise: Difference between pages

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imported>Doug Williamson
m (Replace underscore in Corporate finance link, with space.)
 
imported>Doug Williamson
(Expand for the economics factor of production. Source: ACT ESA exam solution, April 2015, Q3.)
 
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(DGM).  
#A commercial entity.
 
#'Enterprise value' is the total value of a commercial business, whether funded by equity alone or by a combination of equity and debt. Also known as 'entity value'.
'''1.'''
#One of the 'factors of production' in economics, the others classically being labour, land and capital. In this context, 'enterprise' refers to taking the risks involved in organising other resources for the production of goods and services.
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.
 
Its most common uses are:
(1) Estimating the market <u>cost of equity</u> from the current share price; and
(2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.
 
Expressed as a formula:
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 dividend at Time 1 period hence.
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.
 
 
'''2.'''
For example calculating the market <u>value</u> of equity:
D<sub>1</sub> = expected dividend at Time 1 period hence = $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]
= $10m/[0.10 - 0.02 = 0.08]
= <u>$125m.</u>
 
 
'''3.'''
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
 
D<sub>1</sub> = expected dividend at Time 1 period hence = $10m
P<sub>0</sub> = current market value of equity per period = $125m
g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%
 
Ke = $10m/$125m + 2%
= <u>10%.</u>
 
 
Also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.




== See also ==
== See also ==
* [[CertFMM]]
* [[Entity]]
* [[Cost of equity]]
* [[Factors of production]]
* [[Corporate finance]]
* [[Labour]]
* [[Perpetuity]]
* [[Land]]
 
* [[Capital]]
[[Category:Corporate_finance]]

Revision as of 08:24, 22 June 2015

  1. A commercial entity.
  2. 'Enterprise value' is the total value of a commercial business, whether funded by equity alone or by a combination of equity and debt. Also known as 'entity value'.
  3. One of the 'factors of production' in economics, the others classically being labour, land and capital. In this context, 'enterprise' refers to taking the risks involved in organising other resources for the production of goods and services.


See also