Cost of equity -Dividendgrowth model and dividend valuation model

The Growth Model formula on the formula sheet is used to calculate the market value of a share – this is the Dividend valuation model!
To use the formula we need to know the expected dividend growth rate.

The Gordon’s growth approximation on the formula sheet is one way of estimating the dividend growth rate.

There are no other formulae and so I don’t really know what you mean about using the incorrect formula.

I do suggest that you watch our free lectures – they are a complete course for Paper F9 and cover everything you need to be able to pass the exam well.

Firstly the first formula is actually (Do x (1 + g)) / Po) + g

Secondly they are the same formula – one is the other one simply re-arranged.

If you are calculating Po then you use the formula on the formula sheet.

If you know Po and are calculating the cost of equity, then either use the formula on the formula sheet and rearrange it, or more sensibly remember the formula already rearranged (as above) and use that.

Respected sir,
Kaplan book- chapter 20 test ypur understanding 6 asks to calculate value of equity using discounted cash flow. To discount the cashflows the wacc rate (16%) is given and an inflation rate (6%) too, using fisher formula in the answer a real rate is calculated. But the question doesn’t ask so. Are we supposed to do it becuase the question states an inflation rate and thus it indicates that the wacc used is money rate?

No problem, but you must ask in the Ask the Tutor Forum if you want me to answer in the future – this forum is for students to help each other.