{"id":266941,"date":"2024-11-22T11:51:09","date_gmt":"2024-11-22T11:51:09","guid":{"rendered":"https:\/\/imarticus.org\/blog\/?p=266941"},"modified":"2024-11-22T11:51:09","modified_gmt":"2024-11-22T11:51:09","slug":"cost-of-equity","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/cost-of-equity\/","title":{"rendered":"Measuring Cost of Equity: Dividend Discount Model (DDM) and Capital Asset Pricing Model (CAPM)"},"content":{"rendered":"

The <\/span>cost of equity<\/span> is a crucial component of a company’s capital cost. It represents the expected return investors require to invest in the company’s equity. The Dividend Discount Model (DDM) and the Capital Asset Pricing Model (CAPM) are two primary methods used for <\/span>cost of equity calculation<\/span>.<\/span><\/p>\n

If you wish to become an expert in finance concepts and financial analysis, you can enrol in a <\/span>financial analysis course<\/b><\/a>. The <\/span>Postgraduate Financial Analysis Program<\/span><\/i> by Imarticus Learning will be a great fit for you if you are a finance graduate with 0-3 years of work experience. Let us now learn about DDM and CAPM.<\/span><\/p>\n

Dividend Discount Model<\/span><\/h2>\n

The Dividend Discount Model is a valuation method used to estimate the actual or natural value of stocks based on their future dividend payments. The <\/span>Dividend Discount Model (DDM) formula<\/span> can also be used to estimate the cost of equity.\u00a0\u00a0\u00a0<\/span><\/p>\n

Assumptions of DDM<\/span><\/h3>\n
    \n
  1. The company will exist indefinitely.<\/span><\/li>\n
  2. The dividend growth rate will remain constant.<\/span><\/li>\n
  3. The required rate of return (cost of equity) is constant.<\/span><\/li>\n<\/ol>\n

    Dividend Discount Model (DDM) Formula<\/span><\/h3>\n

    Cost of Equity = (Dividend per Share \/ Current Market Price per Share) + Dividend Growth Rate<\/i><\/b><\/p>\n

    Limitations of DDM<\/span><\/h3>\n