Dividend Valuation
Model Concept
Dividend valuation method the cost of equity calculated based
on the relationship between share price and dividend i.e. dividend offered per anum is divided by share price. This relationship can be expressed by the
following equation.
1. Cost of equity = do/ Po
- Constant Dividend
2. Cost of equity = [do
(1+g)/Po] + g - Dividend is
Growing
Example Dividend
Valuation Model
For example the quoted price of company is $ 10 and it pays
dividend 40 cents. What is cost of equity?
Solution
= .4/10 X 100
= 4%
Example of Dividend
Growth
ABC company share price is $ 10; dividend recently paid out
is 40 Cent. The dividend growth is expected is 8%.Calculate the cost of equity
Solution
|
Share Price
|
$ 10
|
|
Dividend
|
40 Cent
|
|
Cost of equity ={
[ .4 x (1.08)/ $ 10 ]+ .08 } x 100
|
8.04%
|
|
|
|
