11.4 Cost of capital using the dividend valuation model

Question 1

What is the dividend valuation model of determining the cost of equity?

Answer 1

The dividend valuation model states that the value of the company (its shares) is the present value of the expected future dividends discounted at the shareholders required rate of return.

Question 2

What is the calculation for the dividend valuation model?

Answer 2

P = D (1 + g) / (K - g)

Where:
D = current dividend level
P = current share price
g = estimated growth rate in dividends
K = cost of equity