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Chaptter 17

2.2 DVM with ddividend ggrowth at aa fixed ratte

D 0 (1 + gg) D 1
r e = ––––––––––– + g = –––– + g
P 0 PP 0

Dₒ == current dividend

D 1 == dividend in 1 year’ss time

g = constant rate of growwth in dividdends

Thee first formuula is on thhe formula sheet

Quuestionn 3

DVMM with groowth

Bishhop Co hass just paid oout a dividend of $0.45 per shaare and exppects
dividdends to grrow at a raate of 3% pper annum for the foreeseeable ffuture. Bisshop
Co’ss current shhare price is $3.50 peer share.

Calcculate the ccost of equuity using th he dividend valuationn model.

Ke == [D 0 (1 + gg)/P 0] + g

Ke == [$0.45 × 1.03/$3.500] + 0.03 = 0.162 or 116.2%

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