Question
CALCULATE THE COST OF EQUITY: The cost of equity can be calculated with the dividend discount model or using CAPM. We will start with the
CALCULATE THE COST OF EQUITY: The cost of equity can be calculated with the dividend discount model or using CAPM. We will start with the dividend discount model: r = D1/P0 + g We have D1 (2020 expected dividend) and P0 (current stock price), it is g that must be calculated. The growth rate (assumed constant) for dividends can be calculated two different ways, 1) Calculate g using historic or projected trends in dividends per share or 2) Calculating g from ROE and reinvestment in the firm: g = ROE * (1-payout ratio). Read the following questions and clearly answer the question as asked, using the appropriate estimation method for the growth rate. 5) What is the 3 year growth rate (2020-2023) of expected dividends? Calculate and describe how you arrived at your answer (what were the inputs). 6) What is the 4 year growth rate (2015-2019) of actual dividends? Calculate and describe how you arrived at your answer (what were the inputs).
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