Dividend growth model and Microprudential: Difference between pages

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(DGM).  
''Bank 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.
The part of the regulatory framework which is designed to enhance the safety and soundness of individual financial institutions, rather than the financial system as a whole.
 
==Applications of the DGM==
 
Common applications of the dividend growth model include:
 
(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.
 
 
==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 ==
* [[CertFMM]]
* [[Capital adequacy]]
* [[Cost of equity]]
* [[Macroprudential]]
* [[Corporate finance]]
* [[Perpetuity]]
 
 
==Other resources==
[[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer student article]]
 
[[Category:Corporate_finance]]

Revision as of 05:55, 27 March 2016

Bank regulation.

The part of the regulatory framework which is designed to enhance the safety and soundness of individual financial institutions, rather than the financial system as a whole.


See also