J hawkins j 2 j e rj rf econ 136 financial economics 8

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Unformatted text preview: econometric-estimation form ri (t ) − rf (t ) = α + β [rm (t ) − rf (t )] + (t ) . These are the first two terms of the multiple linear regression N ri (t ) − rf (t ) = α + j =1 βj [rj (t ) − rf (t )] + (t ) , which suggests the generalization of our CAPM result: N E (ri ) = rf + βm [E (rm ) − rf ] + Portfolios III: R. J. Hawkins j =2 βj [E (rj ) − rf ] Econ 136: Financial Economics 8/ 17 The DDM for Constant Dividend Growth The Gordon Growth Model (Gordon & Shapiro, 1956) Growth In an earlier lecture we derived the Gordon Growth model: V0 = where D0 (1 + g ) D1 = (rs − g ) (rs − g ) D0 ≡ the latest dividend payment g ≡ the dividend growth rate rs ≡ the cost of equity capital D1 ≡ the projected next dividend We can use the CAPM to calculate rs . What about g ? Equities I: R. J. Hawkins Econ 136: Financial Economics 2/ 21 Earnings and Dividend Growth General Observations Dividends are paid out of earnings. To understand dividend growth one needs to understand earnings growth. Three approaches to earnings growth: 1 Study the historical growth rate. 2 Rely on analysts. 3 Estimate from fundamentals. Equit...
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This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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