[Verse 1] When investors buy a stock they want to know What return they should expect their money to grow The cost of equity tells us the rate they demand For the risk that they take with cash in hand If dividends flow year after year There's a model that makes the math crystal clear Take the payment per share that's coming next Divide by the price plus growth to connect [Chorus] Dividend Discount Model shows the way Required return equals D-one over P Plus the growth rate g that stays D-one over P plus g is the key That's the cost of equity [Verse 2] D-one is the dividend expected next year Not the one that was paid when last reports were here P is current stock price trading today G is growth rate that's here to stay This formula works when conditions align Dividends are paid in a steady line Growth rate is stable and reasonable too Not too high or the math won't be true [Chorus] Dividend Discount Model shows the way Required return equals D-one over P Plus the growth rate g that stays D-one over P plus g is the key That's the cost of equity [Bridge] When to use this method well Mature companies with dividends to tell Steady payouts year by year Moderate growth rates crystal clear Not for firms that pay nothing out Not when growth rates jump about Best for utilities banks and more Stable dividend paying store [Chorus] Dividend Discount Model shows the way Required return equals D-one over P Plus the growth rate g that stays D-one over P plus g is the key That's the cost of equity [Outro] Next year's dividend divided by price today Add the growth rate and you're on your way To finding what investors expect to earn The cost of equity lesson learned
← Cost of Equity - CAPM Method | Cost of Equity - Bond Yield Plus Risk Premium →