Estimation of the cost of equity capital using Gordon's dividend discount model

Joseph K.

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Estimation of the cost of equity capital using Gordon's dividend discount model

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Estimation, Cost of Equity Capital, Gordon's Dividend Discount Model, return on equity, investor fund, shareholder's equity

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Abstract

Mishkin and Eakins, (2006) defines expected rate of return on equity as "the amount of net income returned as a percentage of shareholders' equity." The return on equity is used to estimate the profitability of a company by establishing the amount of income generated using investor funds. It is expressed as a percentage and calculated using the formula: (Return on Equity = Net Income/Shareholder's Equity).

Dividends of Australian listed companies from four different sectors
Expected return on equity

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[...] This method is based on the understanding that an investor is to be paid for both the time and the risk involved. Therefore it includes two components, a risk premium in addition to the rate for a security that is risk free. Basing on these factors, this model provides a more accurate expected return on equity. Any of the three methods above can be used to calculate the cost of equity. The values obtained by use of either of the method may vary owing to a number of factors. [...]

[...] USA. Pearson Prentice Hall. Watson, D. & Head, A. (2007), Corporate Finance: Principles and Practice, 4th ed, FT Prentice Hall, pp221–3. Watson, D. & Head, A. [...]

[...] Boritz, (2006) explains that developed banks have access to a lot of avenues to raise capital and are unlikely to increase dividends in an effort to lure shareholders into investing more in bonds. By offering loser dividends, the bank will retain capital necessary for expansion and therefore will reduce the need to borrow loans which attract interest. From these findings, a bank's profitability cannot be assessed simply by comparing its return on investment over a number of years but consideration should be put on the share value during the period as well. [...]

[...] University of Notre Dame. Mimeo. Kumar, S. & Hyodo, K. (2011) Price - earning ratio in Japan: recent evidence and further results. Megginson, W. Corporate Finance Theory, Addison-Wesley, p Mishkin, F. & Eakins, S. (2006) Financial Markets and Institutions 5th ed. [...]

[...] Estimation of the Cost of Equity Capital Using Gordon's Dividend Discount Model Dividends of Australian Listed Companies from Four Different Sectors 1. Travel & Leisure: Crown Resorts Limited is a gaming company listed on the Australian stock exchange with a market capitalization of over six billion Australian dollars. Before the year 2007, it was named as Publishing and Broadcasting limited Infrastructure: Leington Holdings is a telecommunication and infrastructure company with operations in Australia, Asian, the Middle East and New Zealand Biotech: CSL Limited is an international biotechnology company that is based in Australia that researches, manufactures and markets medical products for human diseases Banking: ANZ Bank is an Australian bank, the third in size by market capitalization. [...]

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