The Cost of Equity Based on Current Market Prices Assignment Help

Turn To Myhomeworkhelp.com for Answers on Dividend Discount Models

Are you in search of answers to solve problems on cost of equity? Cost of equity is relevant in corporate finance to convince investors to invest in a company that would generate some good return rates. This is estimated through two different models entirely; one is the Capital Asset pricing model while the other is the dividend discount model. Both these models are reliant on individual factors that allow the calculations of the estimates. While the former is dependent on beta coefficient, the dividend model is based upon the current market price.

Due to the inclusion of various factors and the existence of both the models, students get confused. To eradicate such confusions, it is imperative to seek the cost of equity based on current market prices homework help. Such assistance can be provided by Myhomeworkhelp.com. We are a renowned educational portal that assists students to finish off their assignments and proceed further with the subject.

What is the dividend discount model about?

Gordon’s dividend discount model is reliant on the dividends from the shares of a company. As per the model, the cost of equity is a function of current market prices and future dividends expected out from the company. Simplified, it is the cost of buying equity and the amount that will be received from such purchase.

The cost of buying thus becomes the current market price, based upon which the equity is calculated. However, to derive the formula, it is assumed that the current market price is adjusted as per the required rate of return by the investor for a share.

As per the cost of equity based on current market prices assignment help, the cost of equity is calculated by,

(Dividend in the next period/ current market price) + Growth rate, where dividend in the next period= current dividend.(1+ growth rate)

Example:

The dependant on current market prices of cost of equity can be better illustrated with the help of an example by the cost of equity based on current market prices assignment help.

Lets say, a firm trades its share at $120.  The current dividend is $4, with a growth rate of 6%.

Then accordingly, the dividend for the next period is 4X(1+6%)= $4.24

Current market price= $120

Therefore, cost of equity= (4.24/120) + 6%=9.53%

Advantages and disadvantages of dividend discount model

One of the advantages of this type of model is that it is logical and really simple. However, it is applicable for only dividend paying shares. There are quite a few stocks that do not pay dividends and thus, this model is not applicable in such situations. Also, the assumptions aren’t practical either which makes it difficult to predict.

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