Dividend yield or gordon''s model, Finance Basics

Dividend yield or Gordon's Model

This model is used to determine the cost of various capital components in particular:

  1. Cost of equity - Ke
  2. Cost of preference share capital (perpetual) - Kp
  3. Cost of perpetual debentures - Kd

a) Cost of equity (Ke)- This can be determined with respect to:

    Zero growth firm - P0 = d0      Therefore = d0/P0 

    R = Ke

Where:  d0 = DPS

            R0 = Current MPS

Constant growth firm - P0 = d0(1+g)/Keg

Therefore Ke= d0(1+g)/P0+g

b) Cost of perpetual preference share capital (Kp)

Recall, value of a preference share (FRS) =   Constant DPS/Kp

Consequently: dp = Preference dividend per share

                        Pp = Market price of a preference share

c) Cost of perpetual debenture (Kd) - Debentures pay interest charges, which an allowable expenses for tax purposes.

    Recall, Value of a debenture (Vd)=Interest charges p.a. in ∞/Cost of debt Kd

Therefore Kd =Int/Vd(1-T)

Whereas: Kd = % cost of debt

               T   = Corporate tax rate

              Vd = Market value of a debenture

Posted Date: 1/30/2013 4:24:55 AM | Location : United States







Related Discussions:- Dividend yield or gordon''s model, Assignment Help, Ask Question on Dividend yield or gordon''s model, Get Answer, Expert's Help, Dividend yield or gordon''s model Discussions

Write discussion on Dividend yield or gordon''s model
Your posts are moderated
Related Questions
Problem: (a) Describe why a critical analysis of the following is important while reading a research article: (i) The author, (ii) The date of publication. (b) What do


Profitability Ratio These ratios signify the performance of the firm in relation to its capability to derive returns or profit from investment or from sale of goods that is pr

Monitoring Costs - Agency Costs This is incurred to prevent undesirable managerial actions. They are meant to ensure that both parties live to the spirit of agency contract. T

Limitations of Credit Cards - Source of Finance Limitations of Credit Cards as a Source of Finance are as follow: i) These cards lead to overspending on the part of the hol

(a) State the most appropriate drivers for the following direct expenses: (i) New business administration department's salary costs (ii) Medical examinations for temporary life

Access to Capital Markets and Ownership Structure  Ownership Structure A dividend policy may be driven with Time Ownership Structure as like in small firms whereas manage

1) What happens to the portfolio standard deviations as the investor substitutes the foreign securities for the U.S securities? What combination of U.S and Japanese stock minimizes

Ask question #MinimQuestion You are the financial accountant of Donald Bhd, a manufacturer and wholesaler of soft drinks. Donald Bhd is in direct competition with Fizz Bhd and Po

Baumol's Model - Optimal Cash Balance An application of the EOQ is the Baumol's model which is inventory model to cash management. Its statements are as: The firm emplo