Dividend growth model and Structured deposit: Difference between pages

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imported>Doug Williamson
(Create the page. Source: MoneyFacts http://moneyfacts.co.uk/guides/investments/what-is-a-structured-deposit-product/)
 
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(DGM).  
A retail investment product which offers:
*Guaranteed return of the principal invested; and
*Limited upside participation in a higher risk investment, often an equity index, for example the FTSE 100.


'''1.'''
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:
The provider hedges its risk by using part of in the investment proceeds to buy call options on the index (or other higher risk investment).
(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]]
* [[Call option]]
* [[Cost of equity]]
* [[Deposit]]
* [[Corporate finance]]
* [[Equity]]
* [[Perpetuity]]
* [[FTSE 100]]
 
* [[Index]]
[[Category:Corporate_finance]]
* [[Principal]]
* [[Retail]]
* [[Tracker fund]]

Revision as of 17:08, 24 August 2016

A retail investment product which offers:

  • Guaranteed return of the principal invested; and
  • Limited upside participation in a higher risk investment, often an equity index, for example the FTSE 100.


The provider hedges its risk by using part of in the investment proceeds to buy call options on the index (or other higher risk investment).


See also

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