MPF753 Case Study - Dividend Discount Model Assignment

Assignment Task

Unit Learning Outcomes (ULO)

ULO 1: Apply fundamental principles of corporate finance

ULO 2: Critically analyse companies’ information. 

ULO 3: Provide insights/recommendations based on the results of analysis.

Graduate Learning Outcomes (GLO)

GLO1: Discipline-specific knowledge and capabilities

GLO2: Digital literacy 

GLO3: Critical thinking

GLO4: Discipline-specific knowledge and capabilities

GLO5: Critical thinking

Case study – Dividend Discount Model

While undertaking Finance major at an Australian University, you have learned that 'The dividend discount model' is a well-known model for pricing equity shares using the time value of money concept whereby the current fair price of a share is evaluated as the present value of future expected dividends. In a relatively simple version of this model, it is assumed that the annual growth rate of dividends is constant, and the current fair price of a share is obtained as next period’s dividend divided by the difference between the expected annual return on equity and the constant annual growth rate of dividends. When the current price of a share is already known (e.g., by looking up the publicly available market information on the share prices), the constant dividend growth model (also called the Gordon’s model) can be inverted to derive the annual return expected by the equity-holders of a certain share. This is the methodology sometimes used to estimate the cost of equity capital for a firm.

you are required to apply Gordon’s model to estimate the cost of equity capital of a firm using real data drawn from a financial database.

1) Choose three Australian listed companies (one each from three different industry sectors) that have been in business for at least the last fifteen years. Access Morningstar Datanalysis Premium via the Deakin library (refer to the Assessment 2 data downloading instructions document). Download onto a spreadsheet the last fifteen years (01/07/2007 to 30/09/2022) of dividend payments history for each of your three chosen companies. Briefly describe the three companies you have chosen. If possible, please avoid selecting companies with dividend payments denominated in a foreign currency.

2) All interim dividends must be appropriately annualized before adding up with the year-end final dividends in order to determine the true dollar value of yearly dividends received by the shareholders. For companies that have paid interim dividends, assume that those dividends were paid at the end of the first half of the year and therefore earn six months of interest at a risk-free rate for the next half. The current Australian Government 15-year bonds rate is 4.142% p.a. (data accessed on 7th of November 2022)

3) After determining the dollar dividends received by shareholders for each of the past fifteen years, compute and justify a proxy annual constant growth rate of dividends to be used in Gordon’s model. Use your computed proxy annual constant growth rate to predict next year’s dollar dividend value.

4) In the Morningstar Datanalysis Premium Database, look up the closing price of each of your three chosen stocks as on 30/09/2022. Use Gordon’s model to solve for the expected return on equity for each of the stocks. Do these expected return figures appear justified given the nature of the business, the overall current market conditions, and the industrial sectors within which each of your chosen companies operate? Explain. 

5) What do you feel are the most serious methodological problems associated with Gordon’s model? Outline your argument and carry out a review of relevant financial academic literature and identify at least two alternative cost of equity estimation methods (for example, CAPM, FamaFrench three-factor model and Carhart four-factor model, etc.). Can these identified methods be better than Gordon’s model? Argue your case. You must properly reference all sources of information used and provide the name of the referencing style in the report.

This Management has been solved by our PhD Experts at My Uni Paper. Our Assignment Writing Experts are efficient in providing a fresh solution to this question. We are serving more than 10000+ Students in Australia, the UK, and the US by helping them to score HD in their academics. Our Experts are well-trained to follow all marking rubrics and referencing styles.

Be it a used or new solution, the quality of the work submitted by our assignment experts remains unhampered. You may continue to expect the same or even better quality with the used and new assignment solution files respectively. There’s one thing to be noticed you could choose one between the two and acquire an HD either way. You could choose a new assignment solution file to get yourself an exclusive, plagiarism (with free Turnitin file), expert quality assignment or order an old solution file that was considered worthy of the highest distinction