Dividend Formulas
Dividend
is an important aspect of equity market (stock market) investment. Therefore
dividend is used in couple of important calculation i.e. share price valuation,
cost of equity etc. Dividend formulas for various calculations have been given
below.
Share Valuation (Zero Dividend
Growth) Formula
The
following formula is known as dividend discount model. Share value is
determined by discounting the future dividend using the cost of equity as
discounting factor. This basic concept of dividend discounting has been further
classified into two formulas i.e. Dividend without Growth and dividend is
growing at constant pace).
Share Price = Do
Ke
|
Do=
Dividend
Ke= Cost
of equity
Share
Valuation Example (Zero Growth of Dividend)
Dividend
(Current Year) = .9
Dividend
Growth Expectation = No Growth
Cost of
equity=13%
Solution
=.9/.13
=6.92 (Share Price)
Share Valuation (Constant Dividend Growth) Formula
Share Price = Do ( 1+g)
Ke-g
|
Do=
Dividend
Ke= Cost
of equity
g=
Dividend Growth
Share Valuation Example (Constant
Growth)
Current
year announced dividend = .9
Dividend
Growth Expectation = 5%
Cost of
equity=13%
Solution
Share
Price = Do ( 1+g)
Ke-g
Do=Current
Dividend
Ke =Cost
of equity
g=
Dividend Growth
Share
Price = .9(1+5%)
13%-5%
Share
Price = .9(1+05)
.08
Share
Price = 11.8
Cost of Equity – (Zero Growth or
Constant Dividend)
The
following formula is used to calculate Cost of equity, where there is zero
growth of dividend.
Cost of Equity = Do
Po
|
Do=
Dividend
Po=
Market Share price
Constant Dividend and Cost of Equity
ABC
Company Dividend = .7
Nature
of Dividend= Constant
Quoted
Price = 12
Solution
Cost of
Equity = Constant Dividend
Ex Div Market Price
Cost of
Equity = .7
12
=5.8%
Cost of Equity (Constant Growth of
Dividend)
Dividend
discount model can be used to calculated cost of equity of company. The
following formula is used to calculate cost of equity for constant dividend
growth. This formula cannot be used for negative and random dividend growth.
Cost of Equity =[Do (1+g)] +
g
Po
|
g =
Dividend growth Rate
Ke =
Cost of Equity
Do
=Current Dividend
Po=
Share price
Cost of Equity Example (Constant
Growth of Dividend)
Dividend
for the Year = .7
Growth rate
of Dividend (Expected) = 9%
Share
price= 20
Solution
Cost of Equity =[Do (1+g)] +
g
Po
|
Do=Current
Dividend
Ke =Cost
of equity
g=
Dividend Growth
Share
Price = .7(1+9%) + 9%
20
Share
Price = .7(1+.09) + 9%
20
Share
Price = 12.81%
Dividend Payout Ratio Formula
Dividend
payout ratio show the proportionate of earning distributed among the equity
holder of shareholder. This concept has been explained in detail in my other
article. Dividend payout ratio is calculated simply by dividing the dividend by
the EPS (Earning per Share).
Dividend Payout Ratio = Dividend x100
EPS
|
Dividend Payout Formula Example
Dividend
Announced = 50 cent
Earnings
per Share = 80 Cent
Calculate
Payout ratio of the company?
Solution
Dividend
Payout Ratio = Dividend during the year
EPS or Earning
Company
A = .5 x 100
.8
=62.5%
Dividend Yield Formula
Dividend
yield explains the return on the investment in the form of dividend. This is
useful tool for many investors.
Dividend Yield = Dividend During Year
Share Market
Price
|
Dividend Yield Formula
Example
Dividend
Paid =8
Market
Price of Share = 30
Dividend
Yield?
Solution
Earning
Yield = 8
30
=
24%
Ex Divided Share Price Formula
Ex
dividend share price formula is used to calculate the share price before the
payment of dividend. The ex dividend share price concept is used in dividend
discount model for calculating the cost of equity. Ex Dividend price is simply
calculated by excluding dividend to be paid from the share price.
Ex Dividend Price =
Share Price b- Dividend (to be paid)
|
Ex Div Price Formula Example
Share
Price (Market value) = 12
Dividend
for Year = 4
Calculate
Ex Div Price?
Solution
Ex Div
Price = Share Price before Dividend- Dividend (to be paid)
= 12-4
=8 (Ex
Div Price)
Gordon Dividend Growth Formula
Gordon
dividend growth formula establishes a relationship between retention of profit
and future growth of dividend (direct relationship). Gordon says that in case of high retention of
profit would result in high growth of dividend. This relationship has been
explained in detail in my other article.
g=br
|
g= Dividend Growth
b= Profit retention proportion
r= Cost of equity
Gordon
Dividend Growth Model Example
Profit Retention propionate= 60%
Cost of equity = 12%
Solution
= 60% x 12 %
=7.2%
(Dividend Growth)
Simple Dividend Growth Formula
Simple
dividend growth formula is used to calculate the simple growth (not
compounded). There are some other growth like Gordon dividend growth and
compounded dividend growth, those growth are calculated by other formulas.
Simple Dividend Growth Formula = Current Dividend - 1
x 100
Last Dividend
|
Dividend Free Cash flow Ratio
Dividend
free cash flow is important consideration for dividend decision. This formula
explains about a link between company cash flow and its dividend.
Dividend free cash Flow Ratio = Dividend for Year
Free Cash flow
|
Example
Company
ABS has paid following dividend from 2001 to 2005.
Year Earnings Dividend Free cash Flow
2001 100 20 million 40 million
2002 100 40 million 80 million
2003 100 30 million 60 million
Solution
Year Dividend Free cash Flow Dividend /Free cash Flow
2001 20 million 40 million 20/40 =50%
2002 40 million 80 million 40/80 = 50%
2003 30 million 60 million 30/60 = 50%
