imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| (DGM).
| | ''UK financial market regulation.'' |
|
| |
|
| 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.
| | Financial Market Infrastructure. |
|
| |
|
| 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 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'''</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
| |
|
| |
| = $125m.
| |
|
| |
|
| |
|
| |
| <span style="color:#4B0082">'''Example 2'''</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 per period = $125m.
| |
|
| |
| g = constant periodic rate of growth in dividend from Time 1 to infinity = 2%.
| |
|
| |
|
| |
| Ke = 10 / 125 + 2%
| |
|
| |
| = 10%.
| |
|
| |
|
| |
| Also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.
| |
|
| |
|
|
| |
|
| == See also == | | == See also == |
| * [[CertFMM]] | | *[[Financial Market Infrastructure]] |
| * [[Cost of equity]]
| |
| * [[Corporate finance]]
| |
| * [[Perpetuity]]
| |
| | |
| | |
| ===Other resources===
| |
| [[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer student article]]
| |
|
| |
|
| [[Category:Corporate_finance]] | | [[Category:Cash_management]] |
