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...

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Outline Lecture 21 Organization Dividend Growth Model Cost of Debt WACC Optimal capital structure
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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
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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
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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 ________
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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.
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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 =
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Example: Suppose a stock has just paid a $4.65 per share
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