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%
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