5. Cost of Capital

Question 1

what is the dividend valuation model?

Answer 1

assumes the share price equals the present value of expected future dividends

Question 2

what is the Gorden growth model?

Answer 2

similar to DVM, but it assumes the expected growth in annual dividends is calculated from the proportion of annual earnings that are retained and the rate of return on those retained profits.

Question 3

shortcomings of DVM

Answer 3

• the value of shares originates from dividends which is not always true
• dividends either do not grow or grow at a constant rate.
• estimates of future dividends are based on historical data.

Question 4

WACC

Answer 4

The cost of equity and debt are weighted according to their importance in the financing mix to give the WACC