Banko Dividend Growth Model

Banko Dividend Growth Model - The Banko Dividend Growth...

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The Banko Dividend Growth Model Instead of a dividend growing at a constant rate of growth each year, consider a dividend that increase by the same dollar amount in each year. Professor Banko has come up with a way of valuing such a stock. As an example, consider a stock that has just paid a $2.00 dividend (D 0 = $2.00), and that this dividend is expected to increase in value by $0.10 each year (e.g., D 1 = $2.10, D 2 = $2.20, D 3 = $2.30, etc.); the incremental dividend (ID) would be $0.10 each year. The cash flows that you would receive are diagrammed below: Cash Flows 0 1 2 3 4 --- | | | | | | CF 1 $2.00 $2.00 $2.00 $2.00 --- $2.00 CF 2 $0.10 $0.10 $0.10 $0.10 --- $0.10 CF 3 $0.10 $0.10 $0.10 --- $0.10 CF 4 $0.10 $0.10 --- $0.10 CF 5 $0.10 --- $0.10 CF --- - - - $ 0 . 1 0 CF $ 0 . 1 0 Thus the current dividend (D 0 ) is equivalent to a $2.00 perpetuity to be received in Years 1 through infinity (CF 1 ). You will then receive an incremental dividend (CF 2 ) that is equivalent to a perpetuity to also be received in Years 1 through
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Banko Dividend Growth Model - The Banko Dividend Growth...

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