Cost of equity (Ke): dividend growth model - part 1

In this lesson

1. 0:00 Cost of equity dividend growth model overview
2. 2:00 Why equity costs more than debt
3. 4:01 The cost of equity formula explained
4. 5:04 Calculating growth rate historically
5. 6:18 Growth rate using earnings retention method

About this lesson

This video breaks down the key formula (Ke = D1/P0 + g), explains each component, and shows you how to calculate the growth rate using either historic dividend data or the earnings retention method. Understanding this approach is essential for project appraisal and financial decision-making in CIMA and ACCA qualifications, particularly in Performance Management and Financial Management modules. The dividend growth model only works reliably for listed companies with stable, genuine market share prices and dividends that reflect business performance rather than tax planning. You'll discover why equity costs more than debt (higher risk, no guaranteed returns, lower priority in insolvency) and why volatile share prices or erratic dividend policies can undermine the calculation's accuracy. The video walks through the practical details you need to master: calculating D1 (next year's forecast dividend) from D0, using the correct ex-dividend share price, and determining growth rate g through either the historic growth method or the earnings retention formula (g = r × b). By the end, you'll have a clear grasp of how this model connects investor expectations to your project funding decisions.

Duration: 7m