Question

In: Finance

Describe, compare and contrast the following ordinary share dividend valuation models: (i) zero growth, (ii) constant...

Describe, compare and contrast the following ordinary share dividend valuation models: (i) zero growth, (ii) constant growth, and (iii) variable growth.

Solutions

Expert Solution

Dividend discount model is a model where to calculate the price of a stock we discount the expected dividend for all future years and calculate their present value today. The formula for price of a stock according to dividend discount model is,

Price = Current dividend *(1+ growth rate)/ (required rate- growth rate)

When the growth rate is 0, the growth rate would be 0 and effectively the formula for price of the stock would be equivalent to formula of a perpetuity cash flow. It would be current dividend divided by the required rate.

When the growth rate is constant the price of the stock would be equivalent to expected dividend divided by the difference between the required rate and growth rate. This is still an easy approach to calculate the value of the stock but if the growth rate is higher than the required rate then this formula cannot be applied.

When the growth rate is variable then it is slightly complex to value the stock. First, we have to calculate the dividend for each year in which the growth rate is variable and then we have to calculate the terminal value from the year onwards in which the growth rate becomes constant and then we would discount them to their present value.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Two of the dividend valuation models used in equity valuation are the zero growth model and...
Two of the dividend valuation models used in equity valuation are the zero growth model and the constant growth model. If you were trying to decide which model is best suited to use in valuing a particular company's common stock, what deciding factors would you take into account when trying to choose between the zero growth model and the constant growth model? When comparing the use of these two models, how would each impact the price you would be willing...
Two of the dividend valuation models used in equity valuation are the zero growth model and...
Two of the dividend valuation models used in equity valuation are the zero growth model and the constant growth model. If you were trying to decide which model is best suited to use in valuing a particular company's common stock, what deciding factors would you take into account when trying to choose between the zero growth model and the constant growth model? When comparing the use of these two models, how would each impact the price you would be willing...
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model...
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model when finding the intrinsic value of common stock and preferred stock ? How does adding a growth rate to the valuation process affect the intrinsic value?
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model...
Explain the difference between using the zero-growth dividend valuation model and the constant-growth dividend valuation model when finding the intrinsic value of common stock and preferred stock. How does adding a growth rate to the valuation process affect the intrinsic value?
Constant Growth Valuation Boehm Incorporated is expected to pay a $2.50 per share dividend at the...
Constant Growth Valuation Boehm Incorporated is expected to pay a $2.50 per share dividend at the end of this year (i.e., D1 = $2.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 18%. What is the estimated value per share of Boehm's stock? Round your answer to the nearest cent. $
Compare and contrast the following dividend policies: the constant payout ratio policy and the constant dollar...
Compare and contrast the following dividend policies: the constant payout ratio policy and the constant dollar payout policy. Which policy do most public companies actually follow? Why?
Explain the following briefly: i) Potential ordinary share ii) Ordinary share iii) Financial instrument iv) Equity...
Explain the following briefly: i) Potential ordinary share ii) Ordinary share iii) Financial instrument iv) Equity instrument v) Options, warrant and their equivalents State the double entry for the following: i) Pre-acquisition dividend ii) Post-acquisition dividend iii) Impairment in associate iv) Provision for unrealized profit v) Depreciation of plant
a. Compare and contrast the assumptions of the Malthus and Solow models of growth and their...
a. Compare and contrast the assumptions of the Malthus and Solow models of growth and their conclusions about the determinants of growth. How do the models’ predictions relate to the empirical evidence on growth? b. Consider the Solow model. Consider an economy with capital per worker below the steady state level. Show in a graph and explain in words what will happen to the economy over time.
Compare and contrast valuation models based on discounted cash flows and valuation approaches based on the...
Compare and contrast valuation models based on discounted cash flows and valuation approaches based on the relevant multiples of comparable investments.
Mention in details the assumptions and limitations for the three models of dividend Growth Models: 1.    zero...
Mention in details the assumptions and limitations for the three models of dividend Growth Models: 1.    zero dividend growth 2.    constant dividend growth 3.    variable-growth
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT