Diversity and Dividend growth model: Difference between pages

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1. ''Corporate governance''.
(DGM).  


In the corporate governance context, diversity refers to the range of people employed by an organisation, especially in the most senior positions, including the board of directors.
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.


Diversity normally includes gender, race, sexual orientation, religion, nationality, disability, age and educational background, but it may include other additional factors.
==Applications of the DGM==


Common applications of the dividend growth model include:


2. ''Investment''.
(1) Estimating the market <u>cost of equity</u> from the current share price; and


In the investment context, diversity is the beneficial result of the appropriate diversification of investments.
(2) Estimating the fair <u>value</u> of equity from a given or assumed cost of equity.
 
 
==DGM formulae==
 
The DGM is commonly expressed as a formula in two different forms:
 
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: Market value of equity'''</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
 
= $'''125'''m.
 
 
 
<span style="color:#4B0082">'''Example 2: Cost of equity'''</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 ==
* [[30% Club]]
* [[CertFMM]]
* [[Board of directors]]
* [[Cost of equity]]
* [[Corporate governance]]
* [[Corporate finance]]
* [[Corporate social responsibility ]]
* [[Perpetuity]]
* [[D&I]]
* [[Developments in corporate and market regulation: implications for the treasurer]]
* [[Diversification]]
* [[ESG investment]]
* [[Ethics]]
* [[Governance]]
* [[Kay Review]]
* [[Institute of Business Ethics]]
* [[Shareholder value]]
* [[Stem]]
* [[UK Corporate Governance Code]]




===Other links===
==Other resources==
[http://www.treasurers.org/node/10141 Doing the right thing, ''Sarah Boyce'', The Treasurer]
[[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer student article]]


[[Category:Investment]]
[[Category:Corporate_finance]]
[[Category:Ethics_and_corporate_governance]]

Revision as of 18:10, 2 December 2015

(DGM).

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.

Applications of the DGM

Common applications of the dividend growth model include:

(1) Estimating the market cost of equity from the current share price; and

(2) Estimating the fair value of equity from a given or assumed cost of equity.


DGM formulae

The DGM is commonly expressed as a formula in two different forms:

Ke = D1 / P0 + g

or (rearranging the formula)

P0 = D1 / ( Ke - g )


Where:

P0 = ex-dividend equity value today.

D1 = 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.


Example 1: Market value of equity

Calculating the market value of equity.


Where:

D1 = 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%.


P0 = D1 / ( Ke - g )

= 10 / ( 0.10 - 0.02 )

= 10 / 0.08

= $125m.


Example 2: Cost of equity

Or alternatively calculating the current market cost of equity using the rearranged formula:

Ke = D1 / P0 + g


Where:

D1 = expected future dividend at Time 1 = $10m.

P0 = 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


Other resources

The real deal, The Treasurer student article

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