imported>Doug Williamson |
imported>Administrator |
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| (DGM).
| | ''Economics.'' |
| | | When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). |
| 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.
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| Its most common uses are:
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| (1) Estimating the market <u>cost of equity</u> from the current share price; and
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| (2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.
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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 future dividend at Time 1 period later.
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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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| <span style="color:#4B0082">'''Example 1: Market value of equity'''</span>
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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 future Time 1 = $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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| = $'''125'''m.
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| <span style="color:#4B0082">'''Example 2: Cost of equity'''</span>
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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:
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| D<sub>1</sub> = expected future dividend at Time 1 = $10m.
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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%.'''
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| Also known as the Dividend discount model, the Dividend valuation model or the Gordon growth model.
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| == See also == | | == See also == |
| * [[CertFMM]] | | * [[Deficit]] |
| * [[Cost of equity]]
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| * [[Corporate finance]]
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| * [[Perpetuity]]
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| ==Other resources==
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| [[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer student article]]
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| [[Category:Corporate_finance]]
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