Dividend yield or gordon''s model, Finance Basics

Assignment Help:

Dividend yield or Gordon's Model

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

Cost of equity - K_e
Cost of preference share capital (perpetual) - K_p
Cost of perpetual debentures - K_d

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

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

R = K_e

Where: d₀ = DPS

R₀ = Current MPS

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

Therefore K_e= d₀(1+g)/P₀+g

b) Cost of perpetual preference share capital (K_p)

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

Consequently: d_p = Preference dividend per share

P_p = Market price of a preference share

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

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

Therefore K_d=Int/V_d(1-T)

Whereas: K_d = % cost of debt

T = Corporate tax rate

V_d = Market value of a debenture

Related Discussions:- Dividend yield or gordon''s model

Financial markets-securities and financial intermediaries, Describe the str...

Describe the structure of financial systems with financial markets, securities and financial intermediaries. By a structural point of view a financial system can be considered

Binomial and continuous model - mathematics of finance, Consider a binomial...

Consider a binomial model of a risky asset with the parameters r = 0:06, u = 0:059, d = 0:0562, S 0 = 100, T = 1, 4t = 1=12. Note that u and d are monthly effective rates of retur

Shareholders and management, Shareholders and Management There is near...

Shareholders and Management There is near separation of ownership and management of the firm. Landlord employs professionals as managers who such have technical skills. Manage

Stock market index, Stock Market Index Definition of Stock Market Ind...

Stock Market Index Definition of Stock Market Index An index is a numerical figure that measures relative change in variables between two type of durations. Examples

Finance final, • Company X has $100,000 face value of outstanding bonds con...

• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are cur

Shareholders expectation and growth stage, Shareholders Expectation and Gro...

Shareholders Expectation and Growth Stage Growth Stage Dividend policy is likely to be influenced with firm's growth stage as like a young rapidly growing firm is probabl

Explain about commercial banks in depository institutions, Explain about co...

Explain about commercial banks in depository institutions. Commercial banks: Commercial banks accept deposits or liabilities to create loans or assets and to buy governme

Operations research, A paper mill produces two grades of paper viz., X and ...

A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i

#title.ASF, Ask questioAustralian’s Speleological App Projectn #Minimum 100...

Ask questioAustralian’s Speleological App Projectn #Minimum 100 words accepted#

Disadvantage of leasing an asset, Disadvantage of Leasing an Asset A. ...

Disadvantage of Leasing an Asset A. It is a pre-conditional finance as on the needs of asset B. In the long term the lease charges might out-weigh the cost of buying own as

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages