Dividend Valuation

NotesQuizObjective Test

Essentially this model presumes that a share price is the PV of all future dividends

Calculate this (with or without growth) and multiply it by the total number of shares

It is similar to market capitalisation except it doesn’t use the market share price, rather one worked out using DVM

DVM can be with or without growth.

DVM without Growth

Diagram

Note:

  • Cost of Equity will be given, or calculated via CAPM

  • Take this share price and multiply it by the number of shares

DVM with growth

Diagram

Note:

  • Dividend + growth = Dividend end of year 1

Share Capital (50c) $2 million
Dividend per share (just paid) 24c
Dividend paid four years ago 15.25c
Current market return = 15%
Risk free rate = 8%
Equity beta 0.8

Solution 
Dividend is growing so use DVM with growth model:

Calculating Growth 
Growth not given so have to calculate by extrapolating past dividends as before:

24/15.25 sq root to power of 4 = 1.12 = 12%

So Dividend at end of year 1 = 24 x 1.12

Calculate Cost of Equity (using CAPM) 
8 + 0.8 (15-8) = 13.6%

So using DVM with Growth model
Dividend + growth / Cost of Equity - growth (decimal)

Share price = 24x1.12 / 0.136 - 0.12 = 1,680c

Market cap = $16.8 x (2m / 0.5) = $67.2

NotesQuizObjective Test