Dividend Growth Model Essay

1. Dividend harvest caseThe staple fiber assumption in the Dividend exploitation instance is that the dividend is expected to grow at a immutable range. That this gain rate each(prenominal)ow non change for the duration of the evaluated period. As a result, this whitethorn skew the solution for companies that atomic number 18 experiencing rapid growth. The Dividend Growth place is better suited for those stable companies that equalize the model. Those that argon growing quickly or that dont pay dividends do not fit the assumption parameters, and consequently this model cannot be utilize. In this model, a political party may not give-up the ghost the marketplace growth rate.In enlargeition, since the dividend growth rate is expected to remain constant indefinitely, the other measures of writ of execution in spite of appearance the ships political party ar also expected to come up the analogous growth rate. If in the watercourse state, the dividend rate i s greater that earnings, in cadence this model leave show a dividend payout greater than the earnings of the participation. Conversely, if earnings ar growing faster than dividends, the payout rate will converge towards zero.In summary, the Dividend Growth object lesson works well for those companies growing at a rate equal to or lower than that of the economy and fork up an open and stable dividend payout.In order to count on the cost of rectitude employ the Dividend Growth Model, we simply adjust the models equation for estimating the price of a hold, given(p) as suchP = D1 / (r g)Where P = the price of the takeD1 = the expected Dividend in single yearr = the required rate of returng = the expected Growth ConstantBy solving the equation for k we get the nextP(r g) = D1r g = D1 / Pr = (D1 / P) + gTherefore in order to estimate the cost of blondness through the Dividend Growth Model, we simply add the constant growth rate and the project dividend yield in one(a) year.2. detonator plus Pricing ModelThe assumptions used in the Capital Asset Pricing Model (CAPM) be mistakable in that they confiscate an almost perfect world scenario.Initi on the wholey, CAPM assumes that all investors mystify the same rational expectations of returns, and that these returns are in line with the surmount vaticination for future returns as based on the available information. It also makes the assumption that the dividends are paid normally, that assets are fixed, and that the market is effective and in equilibrium with no ostentatiousness or change in the refer rate. CAPM additionally makes the important assumption that the evaluated stock is right priced and that the adventure level has been properly assessed.Another major assumption is that in that respect are no taxes, transaction fees, or arbitrage opportunities during the evaluation period. This is a large assumption which is generally incorrect. Almost all transactions within the market have s ome sort of tax or fee associated with it.Within CAPM, the required rate of return is found in the following equationr = rf + B (rm rf)Where r = the required rate of returnrf = the risk free rateB = the stocks genus Beta valuerm = The food market returnIn essence CAPM evaluates a stock based on its risk and authorization return compared to a risk-free market portfolio.3. CAPM and the sophisticated Portfolio surmisalModern Portfolio Theory is an attempt to dimension the risks and rewards of investment portfolios through the use of variegation to lower the risk of the entire portfolio trance maintaining high returns. The use of Beta is a key concept in Modern Portfolio Theory. It uses CAPM as its basis to select investments within a portfolio seeking to mix stocks with some(prenominal) optimistic and negative Betas to construct a portfolio with a minimal Beta for the conference of stocks as a whole. Theoretically, the returns from stocks with both positive and negative betas do not incite each other out, but earlier the portfolio is constructed that the returns are independent of the other stocks held, save complimentary in accumulation of returns.4. mind of Untraded Stocks.The general standard for estimating the cost of equity of a non-tradedcompany is through the marketplace Approach. The basis of this approach is that the stocks of nationally traded companies, sedulous in the same of comparable business, are a valid indicator of performance for a non-traded company.Under the Market Approach, in that location are two commonly used valuation methods the Guideline domain lodge method, and the Merger and Acquisition manner.The Guideline globe social club method consists of finding a comparable company and applying that companies financial selective information to the non-traded company. A company chosen to impart a reasonable basis for comparison should ideally be in the same industry as the non-traded company. However, if there are no c ompanies with sufficient info available, as company in a similar industry may be selected. A similar industry should be one that had identical investment characteristics such as markets, growth, and product lines. The difficulty in victimisation this method lies in identifying a public company that is sufficiently comparable.According to the American Institute of Certified Public Accountants arguing onStandards for Valuation Services, the following should be considered when using rule of thumb companiesA. Price information of the guideline company essential be think to the appropriate central financial data of the company evaluatedB. The valuation ratios for the guideline company and the comparative analysis of qualitative and vicenary factors should be used together to influence appropriate valuation ratios to be apply to the subject company.C. Several valuation ratios may be selected for application to the subject company, and some(prenominal) value indications may be ob tained. The appraiser should consider the relative importance accorded to each of the value indications used in arriving at the opinion or conclusion of value.D. To the end that adjustments for dissimilarities with respect to minority and control, or marketability, have not been made earlier, appropriate adjustments for these factors must be made, if applicable.The key to obtaining the most faultless results when using the Guideline CompanyMethod is to use the most comparable company as the guideline company. The closer to the evaluated company in all areas, the more completed the result.The uniting and acquisition method evaluates a company based on real merger and acquisition transactions that contract entire companies or controlling interests in companies. This method may include companies that were any public or private forward to the control transaction. When using this method, all of the underlying information relating to a particular merger or acquisition may not be k nown. The motives of the buyer or seller may cause the transaction amounts to be skewed this will be limpid to the evaluator and can cause an inexact evaluation.By using either of the Market Approach methods, it is still a best(p) guess based on the best available information. The more accurate and comparable the comparison study is, the better the resulting evaluation.REFERENCES1. Booth, Laurence. metre to Pass the Old Maid? http//www.investmentreview.com/ annals/1999/spring/oldmaid.html2. Damodaran, Aswath. Dividend Discount Models.New York University, Leonard N. rotter School of Businesshttp//pages.stern.nyu.edu/adamodar/pdfiles/valn2ed/ch13.pdf3. Citizendium.org. Cost of equity.http//en.citizendium.org/wiki/Cost_of_equity4. Ivkovic, Inya. CAPM Where Market Theories converge and Clash.suite101.com. Sep 29, 2007http//investment.suite101.com/article.cfm/capm_assumptions_and_limitations5. Investopedia.com. Financial Concepts Capital Asset Pricing Model.August 2007http//www.in vestopedia.com/university/concepts/concepts8.asp6. Wallener, Damir. What is Modern Portfolio Theory?http//www.investopedia.com/university/concepts/concepts8.asp7. The American Institute of Certified Public Accountants (AICPA). Statement onStandards for Valuation Services.http//bvfls.aicpa.org/NR/rdonlyres/672E1DD4-2304-47CA-8F34-8C5AA64CB008/0/SSVS_Full_Version.pdf8. Wise, Richard M. Caveats in Using Guideline Company Transactional Data in Valuing a Business.every quarter Journal of the Business Valuation committee of the American Society of Appraisers.Vol. 22, No. 1, jar against 2003http//www.wbbusval.com/english/pdf/BVR4-Caveats-Guideline-Cos-March03.pdf9. Pratt, Shannon P. Business Valuation torso of Knowledge Workbook, 2nd Edition.ISBN 978-0-471-27066-9. Paperback. 192 pages. January 2003