Forums › ACCA Forums › ACCA FM Financial Management Forums › Cost of equity -Dividendgrowth model and dividend valuation model

- This topic has 8 replies, 4 voices, and was last updated 3 years ago by Mahendra.

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- November 30, 2015 at 5:23 am #286285
Can anyone please tell me whats the difference between the dividend growth and valuation model .. im confused when i should use which formula..and also do you know how much marks we lose if we use the incorrect formula..please advise..thanks !

November 30, 2015 at 7:47 am #286309The 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.

November 30, 2015 at 10:30 am #286364Thanks for the quick reply .. 🙂

Just wanted to confirm .. the two different formulas im getting confused with is d/Po + g (valuation model) and d(1+g)/Po + g (growth model) given in the revision kit.. i will watch the lectures and msg if any confusion ..thanks again

November 30, 2015 at 11:56 am #286398Firstly 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.

December 1, 2015 at 7:01 am #286623thanks got it now 🙂

November 22, 2016 at 2:28 am #350472Respected 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?November 22, 2016 at 2:32 am #350473Oh sorry now i remember that for annuities and perpetuities we always use money method. Sorry for asking you sir.

November 22, 2016 at 6:11 am #350525No 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.

March 1, 2019 at 2:57 pm #507003Hey guys

Need assistance in figuring out how work out the dividend growth model on a scientific calculator for example 4square 1.749 - AuthorPosts

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