Category: Python - Miscellaneous

Cost of equity could be found using my program DVM_Versus_CAPM by either methods, the DVM ( Dividend Valuation Model ) or the CAPM ( Capital asset pricing model ).
However, value of the share (Company value) could also be found using my program, if the cost of equity Ke is known, whether assuming a constant dividend where Po = D/Ke or a constant growth g where Po = Do(1+g)/Ke-g.
Though, the growth rate g is estimated in two different ways, by using the extrapolating growth formula, based on the past dividend history or by applying the Gordon’s growth model (g = r x b).
Projects undertaken by firms will have different risk profiles, and so is the company return required, since it reflect this risk, thus, the DVM model assumptions conflict, and yet the DVM high sensitivity to these assumptions.
Nevertheless, using the CAPM (Ke = Rf + Beta(Rm - Rf), the investors will require different rates of return for different projects depending of the risk of each project. Rf is the risk free rate, ( Rm - Rf) is the average risk premium, and Beta is the systematic risk of investment.
Beta of the share could be measured or obtained from the commercial information suppliers such as Datastream, and the more volatile the business the higher is Beta.
My program DVM_Versus_CAPM will be of a value to ACCA’s students and also to students of Corporate Finance. Date: 21 May, 2012

Corporate Finance - Financial Management

Homepage: http://code.activestate.com/recipes/576708-dvm_versus_capm/?in=lang-python

Developer: Fouad Teniou

License: Freeware

Operating System: Windows

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