Banko Dividend Growth Model

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

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online