AFM273 Chapter Notes - Chapter 7: Dividend Yield
26 Jun 2018
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Chapter 7
Equity Cost of Capital: re. The expected return of other investments available in
the market with equivalent risk to the firm’s shares .
Price of a stock: P0 = (Div1 + P1)/(1+ re)
Total Return: re. Equals dividend yield (Div1/P0) + capital gain rate (P1 – P0)/P0
Constant Dividend Growth Model: P0 = Div1/(re – g)
Dividend Growth Rate: g. The rate at which dividends are expected to grow. In a
constant growth model, g equals the capital gain rate.
re = (Div1/P0) + g
Dividend Payout Ratio: Div = Earnings/Shares Outstanding * Div Payout Ratio
Change in Earnings = New Investment * ROI
Retention Rate: The fraction of current earnings that firm retains.
New Investment = Earnings * Retention Rate
g = Retention Rate * ROI
Total Payout Model: PV(Future Total Dividends and Repurchases)/Shares
Outstanding0
Free Cash Flow = EBIT * (1 – tr) – Net Investment – Change in Net Working
Capital
Discounted Free Cash Flow Model: V0 = PV(Future Free Cash Flow of Firm)
P0 = (V0 + Cash0 – Debt0)/Share Outstanding0
Weighted Average Cost of Capital: rwa cc. The cost of capital the firm must pay to
all of its investors, both debt and equity holders. If a firm has no debt, then r e =
rwacc .
V0 = (1 + gfc f)/( rwac c. - gfc f ) * FCFn
gfcf: The long-run growth rate of a firms free cash flows, typically based on the
firm’s revenues.
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Document Summary
Equity cost of capital: r e. the expected return of other investments available in the market with equivalent risk to the firm"s shares . Price of a stock: p 0 = (div 1 + p 1)/(1+ r e) Total return: r e. equals dividend yield (div 1/p 0) + capital gain rate (p 1 p 0)/p 0. Constant dividend growth model: p 0 = div 1/(r e g) Dividend growth rate: g. the rate at which dividends are expected to grow. In a constant growth model, g equals the capital gain rate. r e = (div 1/p 0) + g. Dividend payout ratio: div = earnings/shares outstanding * div payout ratio. Change in earnings = new investment * roi. Retention rate: the fraction of current earnings that firm retains. New investment = earnings * retention rate g = retention rate * roi. Total payout model: pv(future total dividends and repurchases)/shares.
