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.

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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
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