Gordon Dividend Growth Formula

Gordon Dividend Growth Formula

Gordon Dividend growth model is based on the concept of reinvestment of retained profit. It is believed that retained profit will be reinvested, which will result in dividend growth. This Growth is presented by following Formula

g=Br

Where

g=Growth

B= Proportionate of profit retuned

r= Return on equity

Gordon Dividend Growth Model Example

Number of Share = 100,000

Net Asset= 200,000

Market Value = 3

Dividend Paid= 30,000

Post Tax profit = 50,000

Calculate cost of equity and Dividend Growth?

Solution

1.    Dividend Growth

Return on Equity = Profit Post Tax       

                             Net Asset

Return on Equity = 50,000       

                             200,000

Return on Equity =     25%

                            

Profit Retained= 20,000       

                         50,000

=40%

Growth = 40% x 25%

= 10% (Growth)

2. Cost of Equity

Cost of Equity =[ Do ( 1+g) ] +g    

                         Share Price

= Cost of Equity =[ 30,000 ( 1+10%) ] + 10%  

                              100000x 3

= 21%