COMMERCE 3FA3- Final Exam Guide - Comprehensive Notes for the exam ( 90 pages long!)
28 Mar 2018
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Cost of equity: the return that equity investors require on their investment in the firm. G: firm"s dividend will grow at a constant rate. P0 the price per share of the stock. Re: (the e stands for equity) for the required return on the stock. Can arrange this to solve for re as follows: To use the dividend growth model, we must come up with an estimate for g, the growth rate. There are essentially two ways of doing this: (1) use historical growth rates, or (2) use analysts" forecasts of future growth rates. Retention ratio: retained earnings divided by net income. 1 + g = 1 + retention ratio x return on retained earning. Return on equity (roe): net income after interest and taxes divided by average common shareholders" equity. We now have a simple way to estimate growth: g = retention ratio x roe.
