Q. Example of Dividend valuation model?

Dividend valuation model D₁/P +g= 24(1.06)/ 428+ 0·06 = 0·119 or 11·9%

An incorrect formula for the dividend evaluation model was used in the draft. An estimation of the next dividend not the current dividend should be used. The growth rate must be based upon dividend growth and not earnings growth. Capital asset pricing model the equity beta as well as not the asset beta is required when estimating the cost of equity Assuming debt to be risk free

Asset beta = Equity beta *E/(E+D (1- t))

1·1 = Equity beta *214/(214+ 85(1- 0.3))

The equity beta is 1·41

ke = Rf + (Rm - Rf) beta = 6% + (14% - 6%) 1·41 = 17·28%

The CAPM estimation of the cost of equity will be used in the estimate of the weighted average cost of capital.

Posted Date: 7/12/2013 12:33:20 AM | Location : United States

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