Estimating the Cost of Equity Capital Divined Shareholders

Question: Discuss about the Estimating the Cost of Equity Capital for Divined Shareholders. Answer: B: Computation of true dollar value of dividend received by shareholders of Dominos Pizza Year Interim Dividend Annualized Interim dividend Interest from risk free rate Final Dividend True dollar value of yearly dividend received 2016 $ 34.70 $ 69.40 $ 0.33 $ 37.80 $ 107.53 2015 $ 24.60 $ 49.20 $ 0.24 $ 27.20 $ 76.64 2014 $ 17.70 $ 35.40 $ 0.17 $ 19.00 $ 54.57 2013 $ 15.50 $ 31.00 $ 0.15 $ 15.40 $ 46.55 2012 $ 13.00 $ 26.00 $ 0.12 $ 14.10 $ 40.22 2011 $ 10.40 $ 20.80 $ 0.10 $ 11.50 $ 32.40 2010 $ 6.00 $ 12.00 $ 0.06 $ 11.80 $ 23.86 2009 $ 4.40 $ 8.80 $ 0.04 $ 8.00 $ 16.84 2008 $ 4.10 $ 8.20 $ 0.04 $ 6.80 $ 15.04 2007 $ 4.10 $ 8.20 $ 0.04 $ 6.80 $ 15.04 2006 $ 4.10 $ 8.20 $ 0.04 $ 6.80 $ 15.04 Computation of true dollar value of dividend received by shareholders of Wools worth Year Interim Dividend Annualized Interim dividend Interest from risk free rate Final Dividend True dollar value of yearly dividend received 2016 $ 44.00 $ 88.00 $ 0.42 $ 48.00 $ 136.42 2015 $ 67.00 $ 134.00 $ 0.64 $ 72.00 $ 206.64 2014 $ 65.00 $ 130.00 $ 0.62 $ 72.00 $ 202.62 2013 $ 62.00 $ 124.00 $ 0.60 $ 71.00 $ 195.60 2012 $ 59.00 $ 118.00 $ 0.57 $ 67.00 $ 185.57 2011 $ 57.00 $ 114.00 $ 0.55 $ 65.00 $ 179.55 2010 $ 53.00 $ 106.00 $ 0.51 $ 62.00 $ 168.51 2009 $ 48.00 $ 96.00 $ 0.46 $ 56.00 $ 152.46 2008 $ 44.00 $ 88.00 $ 0.42 $ 48.00 $ 136.42 2007 $ 35.00 $ 70.00 $ 0.34 $ 39.00 $ 109.34 2006 $ 28.00 $ 56.00 $ 0.27 $ 6.80 $ 63.07 Computation of true dollar value of dividend received by shareholders of ANZ Bank Year Interim Dividend Annualized Interim dividend Interest from risk free rate Final Dividend True dollar value of yearly dividend received 2016 $ 80.00 $ 160.00 $ 0.77 93 $ 253.77 2015 $ 86.00 $ 172.00 $ 0.83 95 $ 267.83 2014 $ 83.00 $ 166.00 $ 0.80 95 $ 261.80 2013 $ 73.00 $ 146.00 $ 0.70 91 $ 237.70 2012 $ 66.00 $ 132.00 $ 0.63 79 $ 211.63 2011 $ 64.00 $ 128.00 $ 0.61 76 $ 204.61 2010 $ 52.00 $ 104.00 $ 0.50 74 $ 178.50 2009 $ 46.00 $ 92.00 $ 0.44 56 $ 148.44 2008 $ 62.00 $ 124.00 $ 0.60 74 $ 198.60 2007 $ 62.00 $ 124.00 $ 0.60 74 $ 198.60 2006 $ 56.00 $ 112.00 $ 0.54 69 $ 181.54 C. The dividend growth rate is useful in predicting the dividend of next year using Gordons model. The dividend growth rate means the percentage of growth that the dividend of a particular stock has witnessed over time (Madoroba and Kruger 2015). The dividend growth rate can be calculated by using compound annual growth rate method or it can be calculated using the simple liner method that is average (Wang and Brand 2015). The compound annual growth rate method takes into consideration only the dividend of beginning and ending period. Therefore, it can be said that fluctuation in the intervening periods are not reflected in this model (Acheampong and Agalega 2013). The dividend calculated using liner method reflects all the changes in the intervening period but there is a possibility that sudden rise and dividend in any particular year will affects its outcome (Belo et al. 2015). In this section, the dividend growth rates have been calculated under both the models and after analyzing th e result the dividend growth rate using average method has been selected to be used in the Gordons model (Anesten et al. 2015). The calculations are given below: Compounded Annual Growth rate method Calculation of proxy constant annual growth rate using CAGR model for Domino's Pizza Particulars Amount Ending value i.e. dividend on 2016 $107.53 Beginning value i.e. dividend on 2006 $15.04 Number of years 10 Compound annual growth rate 22% Calculation of proxy constant annual growth rate using CAGR model for Wools Worth Particulars Amount Ending value i.e. dividend on 2016 $136.42 Beginning value i.e. dividend on 2006 $63.07 Number of years 10 Compound annual growth rate 8% Calculation of proxy constant annual growth rate using CAGR model for ANZ Bank Particulars Amount Ending value i.e. dividend on 2016 $253.77 Beginning value i.e. dividend on 2006 $181.54 Number of years 10 Compound annual growth rate 3% Liner method or simple average method Computation of proxy constant annual growth rate using simple average of the growth rate of Domino's Pizza Year Dividend at the end of the year Growth rate 2016 $ 107.53 40% 2015 $ 76.64 40% 2014 $ 54.57 17% 2013 $ 46.55 16% 2012 $ 40.22 24% 2011 $ 32.40 36% 2010 $ 23.86 42% 2009 $ 16.84 12% 2008 $ 15.04 0% 2007 $ 15.04 0% 2006 $ 15.04 N/A Average growth rate of dividend 23% Computation of proxy constant annual growth rate using simple average of the growth rate of Wools Worth Year Dividend at the end of the year Growth rate 2016 $ 136.42 -34% 2015 $ 206.64 2% 2014 $ 202.62 4% 2013 $ 195.60 5% 2012 $ 185.57 3% 2011 $ 179.55 7% 2010 $ 168.51 11% 2009 $ 152.46 12% 2008 $ 136.42 25% 2007 $ 109.34 73% 2006 $ 63.07 N/A Average growth rate of dividend 11% Computation of proxy constant annual growth rate using simple average of the growth rate of ANZ Bank Year Dividend at the end of the year Growth rate 2016 $ 253.77 -5% 2015 $ 267.83 2% 2014 $ 261.80 10% 2013 $ 237.70 12% 2012 $ 211.63 3% 2011 $ 204.61 15% 2010 $ 178.50 20% 2009 $ 148.44 -25% 2008 $ 198.60 0% 2007 $ 198.60 9% 2006 $ 181.54 N/A Average growth rate of dividend 4% D. The Gordons model is used for calculating the current price of the share (Brightman et al. 2015). It is particularly helpful in calculating the intrinsic value of the shares based on the series of dividends which is expected to grow at a constant rate (Hackett 2013). The formula of Gordon growth model is: P=D (1+g)/ (k-g) Here P indicates current price of the share, D is the current years dividend, g is the growth rate and k is the expected rate of return. The expected return can be calculated rearranging the same formula (Brick et al. 2014). K=g+ (D (1+g))/P The calculations of expected rate of return using the Gordons growth model is given below: Calculation of Expected rate of return using Gordons Model of Dominos Pizza Particulars Amount Current year Dividend $ 72.50 Market price of the stock $ 68.13 Dividend growth rate 23% Expected rate of return 153.89% Calculation of Expected rate of return using Gordons Model of Wools worth Particulars Amount Current year Dividend $ 92.00 Market price of the stock $ 20.89 Dividend growth rate 11% Expected rate of return 499.85% Calculation of Expected rate of return using Gordons Model of ANZ Bank Particulars Amount Current year Dividend $ 173.00 Market price of the stock $ 24.12 Dividend growth rate 4% Expected rate of return 749.94% The above calculation shows that expected rate of return of the companies appears to be too high (Nhleko and Musingwini 2016). This expected rate of return is not justified keeping in view the general market condition and the industry in which the business operates. The existing market condition in Australia is highly competitive (Penman 2015). The business needs funds to expand their business in such circumstances if such high amount is paid out as dividend then it will hurt the long term growth of the business (Nhleko and Musingwini 2015). Therefore based on the analysis it can be concluded that such high rate of expected return is not justified (Jansen 2013). Reference Acheampong, P. and Agalega, E., 2013. Examining the Dividend Growth Model for Stock Valuation: Evidence from Selected Stock on the Ghana Stock Exchange.Research Journal of Finance and Accounting,4(8), pp.112-120. Anesten, S., Mller, N. and Skogsvik, K., 2015.The Accuracy of Parsimonious Equity Valuation Models-Empirical tests of the Dividend Discount, Residual Income and Abnormal Earnings Growth model(No. 2015: 3). Stockholm School of Economics. Belo, F., COLLINà ¢Ã¢â€š ¬Ã‚ DUFRESNE, P.I.E.R.R.E. and Goldstein, R.S., 2015. Dividend dynamics and the term structure of dividend strips.The Journal of Finance,70(3), pp.1115-1160. Brick, I.E., Chen, H.Y., Hsieh, C.H. and Lee, C.F., 2014. A comparison of alternative models for estimating firms growth rate.Review of Quantitative Finance and Accounting, pp.1-25. Brightman, C., Masturzo, J. and Beck, N., 2015. Are Stocks Overvalued? A Survey of Equity Valuation Models.Research Affiliates Fundamentals. Hackett, A.C., 2013.The application of income valuation models to energy utilities: assumptions, insights and conclusions(Doctoral dissertation, California State University, Sacramento). Jansen, D.W., 2013. Understanding the Sum of Perpetuities Method for Valuing Stock Prices.Journal of Economics (03616576),39(1). Madoroba, E. and Kruger, J.W., 2015. 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