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Estimating the cost of equity

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# 2 Worked examples – Estimating risk and return for shares

View the animations on the following pages to see worked examples using formulae from Section 1: Estimating risk and return for shares.

You can use the animations in a variety of ways:

• Play and watch the animation from beginning to end.
• Review the calculation task and pause the animation while you find the solution on your own. Continue playing the animation to check your own solution.
• To revise, check your own worked solution against that shown in the animation.

You can play the animations as many times as you want.

## Dividend valuation model (DVM)

Throughout this course, we use the Gordon Growth variation of the dividend valuation model (DVM). The Gordon Growth model assumes constant growth in dividends.

Play the animations below to see worked examples of the mathematical techniques covered in this course.

These examples show you how to:

1. use the DVM to calculate the expected return on a share
2. use the DVM to calculate the expected return on a share using the share’s dividend yield
3. find the equity risk premium (ERP) using:
• a dividend yield
• growth expectations for dividend yield and
• the risk-free rate. This is the third way of estimating an ERP.

These examples use the dividend valuation model (DVM), which is explained in the text you read at the start of the course.