COMMERCE 3FA3 Lecture Notes - Lecture 1: Discount Window, Exit Strategy, Dividend Policy

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 3FA3
• Professor: Anwar Husain

Document Summary

A cost of capital of say 9%, means all investments must earn more than 9% to be profitable. Example: loan = 5% interest: lowest stocks, >3% add value, <3% destroy value, cost of equity, dividend growth, sml/capm model, preferred shares, formula for dividend yield, cost of debt, will always be given. 3 parts to calculate cost of capital: most expensive source of. Dividend growth model: (cid:1842)(cid:2868)= (cid:3005)(cid:3117)(cid:3019) (cid:3034) d0 price of stock, d1 dividend 1 year from now (cid:1844)(cid:3032)=(cid:3005)(cid:3117)(cid:3116)+(cid:1859) g annual growth rate, re cost of equity (cid:1844)(cid:3032)=(cid:1830)(cid:2869)(cid:1842)(cid:2868)+(cid:1859) Example: company ____ /share, dividend stock price is . 00, dividends grow at. There are two ways to calculate historical growth rate: arithmetic, geometric (requires special calculator) Take each of these values and add together then divide by number of terms to get average/year (cid:1830)(cid:2874)=(cid:882). (cid:891)(cid:891)(cid:4666)(cid:883)+(cid:882). (cid:883)(cid:890)(cid:889)(cid:887)(cid:4667) =11. 8% is the return required by apple investors. Pros of dividend growth model: simple and data available.