What is a dividend growth model?
The dividend growth model is a method for estimating the company's cost at its own capital. Capital costs are closely related to the required rate of return on the company, which is the percentage of return on business opportunities. Companies use this model to perform shares on dividends and growth of their shares, which is discounted back to today's value of the dollar. This allows the owners and managers of businesses to use several basic prerequisites to estimate the price of the shares the company will receive the required rate of return. Owners and managers of enterprises can determine their own return level or use a standard business environment. The standard return can be a historical percentage of return from the national stock exchange or return, and the Company can earn from investing in other business opportunities.
The dividend growth model is often calculatedThe following formula: the value is equal to [currently dividend (one plus percentage of dividend growth)] divided by the required return rate of a smaller percentage of dividend growth. For example, suppose the company pays a $ 1.50 dividend in the US (USD), has a historical growth rate of 2 percent per year, and the company requires 12 % of return levels. Using the formula of the dividend growth model, the value of the shares to obtain the required return rate is $ 15.30: (1.50 x (1 + 0.02)) / (0.12 + 0.02). If the company wants to make a 12 % return level under these conditions, the company should buy stocks when it reaches $ 15.30 in the open market.
Private companies or narrowly held businesses that do not issue dividends can use the growth model of dividendodhadhad value for which they receive the level of return. Rather than using dividends, companies can add information regarding their net income. Companies can use their current net receiptM for recent accounting periods and percentage of income growth in the dividend growth model. Although it will result in a different value, he is still a useful character.
The main disadvantage of this calculation is the fact that it uses prerequisites to calculate the inventory value. These assumptions may not precisely reflect current market conditions or are rapidly changing on the basis of the monetary or fiscal policy of the nation that changes how businesses publish or dividends. Owners and managers of enterprises must explain these changes by not forming hard and fast business policies based on the dividend growth model.