Dividend Growth Model
Weighted average cost of capital (WACC) is the total sum of the weighted cost of debt and cost of equity capital. It measures the rate of return which company need to achieve to satisfy every members who spend in. Every investor is entitled to the opportunity cost when putting his or her money in the manager’s hand. It is the rate of return they are able to achieve from the next best alternative (Pike et al., 2012, Chapter 5). The WACC approach multiplies the cost of each basis of investment by the total capital proportion. Thus through weighted average cost of capital method, firm’s each categories of capital is proportionally weighted. Cost of equity is the minimum rate of return that firm must offer owners to reward for waiting for bearing …show more content…
It is also popularly known as dividend discount model. The model can be extended to cover persistent growth each year. Under this model the price of the share is the sum of the discounted dividends, growing at annual rate ‘g’ (Pike et al., 2012, chapter 3). Here in this question, dividend payout is 225 million DKK per year and growth percentage is 5 per year. Thus,
P0 = (D0(1+g))/((Ke-g))
D0 = this year’s recently dividend payout, D0(1+g) is the dividend to be paid in one year’s time in the future, g= future annual growth rate of dividend and Ke= cost of equity. Under the DGM the worth of Falck A/s is amounted as:
DKK. 12,042.64 Million
Valuation of worth of the firm needs to be valued for a numbers of reasons. The main reasons include obtaining a listing, mergers and takeovers (purchase or sale), capital gain tax computation and so forth (Garrett 2012). In the current task one of the great difficulties for valuing the company Falck A/s is unlisted though listed companies have their share price
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Dividend Growth approach is quite appreciable because the valuation of firm is determined as the Falck A/s’s earnings and profit. As its assumption is made on the basis of earnings from the new investment and the growth is generated by the retained earnings. However some drawbacks exist in the DGM for example what if the company does not pay the dividends for example Apple Corporation. In the case of the company doesn’t pay dividend there is no value seemed. Furthermore, when growth exceeds the cost of equity the value would be
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