Financial Terms Dividend growth model

# Definition of Dividend growth model

## Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

# Related Terms:

## constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

## economic components model

Abramsâ€™ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

## Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

## log size model

Abramsâ€™ model to calculate discount rates as a function of the logarithm of the value of the firm.

## QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

## Arbitrage-free option-pricing models

Yield curve option-pricing models.

## Asset pricing model

A model for determining the required rate of return on an asset.

## Asset pricing model

A model, such as the Capital Asset Pricing model (CAPM), that determines the required
rate of return on a particular asset.

## Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

## Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

## Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security

## Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in

## Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

With dividend.

## Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.

## Deterministic models

Liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models

## Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

## Dividend

A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for \$20 a share with an annual dividend of \$1 a share yields the investor 5%.

## Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.

## Dividend clientele

A group of shareholders who prefer that the firm follow a particular dividend policy. For
example, such a preference is often based on comparable tax situations.

## Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

## Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.

## Dividend payout ratio

Percentage of earnings paid out as dividends.

## Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.

## Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

## Dividend rate

The fixed or floating rate paid on preferred stock based on par value.

## Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

## Dividend rights

A shareholders' rights to receive per-share dividends identical to those other shareholders receive.

## Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

## Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

## Dividends per share

dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.

## Extra or special dividends

A dividend that is paid in addition to a firm's "regular" quarterly dividend.

## Extrapolative statistical models

models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

## Ex-dividend

This literally means "without dividend." The buyer of shares when they are quoted ex-dividend
is not entitled to receive a declared dividend.

## Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.

## Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

## Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

## Growth manager

A money manager who seeks to buy stocks that are typically selling at relatively high P/E
ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.

## Growth opportunity

Opportunity to invest in profitable projects.

## Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.

## Growth rates

Compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).

## Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.

## Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

## Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock tables.

## Internal growth rate

Maximum rate a firm can expand without outside source of funding. growth generated
by cash flows retained by company.

## Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

## Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

## Modeling

The process of creating a depiction of reality, such as a graph, picture, or mathematical
representation.

## Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

## Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.

## Pie model of capital structure

A model of the debt/equity ratio of the firms, graphically depicted in slices of
a pie that represent the value of the firm in the capital markets.

## Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.

## Residual dividend approach

An approach that suggests that a firm pay dividends if and only if acceptable
investment opportunities for those funds are currently unavailable.

## Single factor model

A model of security returns that acknowledges only one common factor.
See: factor model.

## Single index model

A model of stock returns that decomposes influences on returns into a systematic factor,
as measured by the return on the broad market index, and firm specific factors.

## Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors

## Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.

## Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

## Single-index model

Related: market model

## Special dividend

Also referred to as an extra dividend. dividend that is unlikely to be repeated.

## Stochastic models

Liability-matching models that assume that the liability payments and the asset cash flows
are uncertain. Related: Deterministic models.

## Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.

## Sustainable growth rate

Maximum rate of growth a firm can sustain without increasing financial leverage.

## Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

## Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.

## Two-factor model

Black's zero-beta version of the capital asset pricing model.

## Two-state option pricing model

An option pricing model in which the underlying asset can take on only two
possible (discrete) values in the next time period for each value it can take on in the preceding time period.
Also called the binomial option pricing model.

## Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

## With dividend

Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: exdividend.

## Yield curve option-pricing models

models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

## Dividend

A payment a company makes to stockholders. Earnings before income tax. The profit a company made
before income taxes.

## Dividend

The payment of after-tax profits to shareholders as their share of the profits of the business for an accounting period.

## Dividend income

Income that a company receives in the form of dividends on stock in other companies that it holds.

## Dividends

Amounts paid to the owners of a company that represent a share of the income of the company.

## dividend payout ratio

Computed by dividing cash dividends for the year
by the net income for the year. Itâ€™s simply the percent of net income distributed
as cash dividends for the year.

## dividend yield ratio

Cash dividends paid by a business over the most
recent 12 months (called the trailing 12 months) divided by the current
market price per share of the stock. This ratio is reported in the daily
stock trading tables in the Wall Street Journal and other major newspapers.

## Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

## dividend growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a companyâ€™s common stock

## growth rate

an estimate of the increase expected in dividends
(or in market value) per share of stock

a model that involves
(1) few physical assets,
(2) little management hierarchy, and
(3) a direct pipeline to customers

## Binomial model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.

## Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.

## Markowitz model

A model for selecting an optimum investment portfolio,
devised by H. M. Markowitz. It uses a discrete-time, continuous-outcome
approach for modeling investment problems, often called the mean-variance

## Dividend

A payment made to shareholders that is proportional to the number of shares
owned. It is authorized by the Board of Directors.

## capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

## cash dividend

Payment of cash by the firm to its shareholders.

## dividend

Periodic cash distribution from the firm to its shareholders.

## dividend discount model

Computation of todayâ€™s stock price which states that share value equals the present value of all expected future dividends.

## dividend payout ratio

Percentage of earnings paid out as dividends.

## ex-dividend date

Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock before this date is entitled to a dividend.

## information content of dividends

dividend increases send good news about cash flow and earnings. dividend cuts send bad news.

## internal growth rate

Maximum rate of growth without external financing.

## MM dividend-irrelevance proposition

Theory that under ideal conditions, the value of the firm is unaffected by dividend policy.

## percentage of sales models

Planning model in which sales forecasts are the driving variables and most other variables are
proportional to sales.

## present value of growth opportunities (PVGO)

Net present value of a firmâ€™s future investments.

## stock dividend

Distribution of additional shares to a firmâ€™s stockholders.

## sustainable growth rate

Steady rate at which a firm can grow without changing leverage; plowback ratio Ă— return on equity.

## Dividends

Profits paid out to shareholders by a corporation.