11.4 Cost of capital using the dividend valuation model Flashcards
1
Q
What is the dividend valuation model of determining the cost of equity?
A
The dividend valuation model states that the value of the company (its shares) is the present value of the expected future dividends discounted at the shareholders required rate of return.
2
Q
What is the calculation for the dividend valuation model?
A
P = D (1 + g) / (K - g)
Where: D = current dividend level P = current share price g = estimated growth rate in dividends K = cost of equity