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Unformatted text preview: continue. g = ( 1 – Payout ) (ROE) = (0.35) (15%) = 5.25% Example: Estimating the Dividend Example: Estimating the Dividend Growth Rate (g) 2. Use the historical average Year 2000 2001 2002 2003 2004 Dividend 1.23 1.30 1.36 1.43 1.50 Percent Change ­ (1.30 – 1.23) / 1.23 = 5.7% (1.36 – 1.30) / 1.30 = 4.6% (1.43 – 1.36) / 1.36 = 5.1% (1.50 – 1.43) / 1.43 = 4.9% Average = (5.7 + 4.6 + 5.1 + 4.9) / 4 = 5.1% Advantages and Disadvantages of Advantages and Disadvantages of Dividend Growth Model Advantage – easy to understand and use Disadvantages Only applicable to companies currently paying dividends Not applicable if dividends aren’t growing at a reasonably constant rate Does not explicitly consider risk The SML (CAPM) Approach The SML (CAPM) Approach Use the following information to compute our cost of equity Risk­free rate, Krf Market risk premium, E(KM) – Krf Systematic risk of asset, β K s = K rf + β E ( E ( K M ) − K rf ) Example ­ SML Example ­ SML Suppose you...
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