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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:
where D0 (1 + g )
(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
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.
- Fall '08