Dividend Growth Model Case Study
1.0 Introduction
A firm acquires its assets by either accumulating equity or debts or even both. There are costs linked with obtaining capital and Weighted Average Cost of Capital (WACC) is an average sum utilised to demonstrate the expense of financing a firm’s asset base. In estimating, WACC, the company's equity value, and debt value henceforth the firm esteem should be determined including the cost of equity and cost of debts. However, this report only focused on the estimation of the cost of equity using two approaches which is the Dividend Growth Model and Capital Asset Pricing Model (CAPM). Both the models were presented according to the assumptions and the underlying theory of each model; Gordon Growth Model and Security Market Line.
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The profit payout of the company must be steady with the presumption of stability, since stable companies for the most part pay substantial dividends. Specifically, this model will under assess the estimation of the stock in companies that reliably pay out short of what they can manage the cost of and aggregate trade out the procedure. (Damodaran, …show more content…
Personalized securities are plotted on the security market line graph. On the off chance that security's risk oppose anticipated return is plotted over the security market line which means it is underestimated in light of the fact that the speculators can expect a more prominent return for the inherent risk. A security plotted underneath the security market line is exaggerated on the grounds that the financial specialist would be tolerating less return for the measure of risk anticipated. (Machado,
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