L_____21_(1).pptx - Outline Lecture 21 Organization Dividend Growth Model Cost of Debt WACC Optimal capital structure The Cost of Capital Cost of Equity

# L_____21_(1).pptx - Outline Lecture 21 Organization...

• 21

This preview shows page 1 - 8 out of 21 pages.

Outline Lecture 21 Organization Dividend Growth Model Cost of Debt WACC Optimal capital structure The Cost of Capital: Cost of Equity The return that investors require for the equity financing can be estimated by one of the two models: CAPM approach Dividend Growth Model Approach The Dividend Growth Model Approach Estimating the cost of equity: the dividend growth model approach, assuming dividend growth rate g . According to the constant growth model, D 1 P 0 = R E - g Rearranging, we get the Cost of Equity D 1 R E = + g P 0 The Dividend Growth Model Approach Implementing the Approach: the cost of equity using the dividend growth model approach Price and latest dividend are ___________ g must be estimated. Estimating g —typically use ________ Example: Suppose a stock has just paid a \$4.65 per share dividend. The dividend is projected to grow at the same rate as the average rate for the last 4 years. Estimate the Cost of Equity or the required return on stock, if the stock price today is \$131.25 per share ? Use Dividend Growth Model. The dividends history is given. Estimating the Dividend Growth Rate Dollar Percentage Year Dividend Change Change 2014 \$3.87 - - 2015 4.40 2016 4.5 2017 4.25 2018 4.65 Average Growth Rate g = Example: Suppose a stock has just paid a \$4.65 per share  #### You've reached the end of your free preview.

Want to read all 21 pages?

• Spring '16
• Marion Manic

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern