(161)---COST OF CAPITAL: THE DIVIDEND GROWTH MODEL

Cost of Capital: The Dividend Growth Model

A firm’s internal equity consists of its retained earnings. The opportunity cost of the retained earnings is the rate of return foregone by equity shareholders. The shareholders generally expect dividend and capital gain from their investment. The required rate of return of shareholders can be determined from the dividend valuation model.

There are two main costs are there

1. Internal cost of equity (reserves)
2. External cost of equity (new share issues)

So we can use three types of models for calculating cost of equity using dividend growth model.

1. Normal growth
2. Super normal growth
3. Zero growth