Equity Investments  DDM and the Earnings Multiplier
The Components of An Investors' Required Rate of Return
 Real riskfree rate  This rate assumes no inflation or risk is prevalent, but that it is simply generated by the supply and demand of the markets.
 Expected rate of inflation  This rate anticipates the potential inflation that is going to occur in the market.
 Risk premium  The premium is reflective of the risks inherent in the stock, as well as the market. Such risks include liquidity risk, business risk and general macroeconomic risk.
The Country Risk Premium
The country risk premium is the general risk of a security inherent with the foreign country related to the security.
A country's risk premium includes the risk from unexpected economic events in a country and the risk from associated political events. 
The country risk premium should be added to the general risks a security faces when estimating the required return for a foreign security.
The Implied Dividend Growth Rate
A company's dividend growth rate can be derived from a company's ROE and its retention rate.
The retention rate of a company is the amount of earnings a company retains for its internal growth. A company's ROE is the return on the funds invested back into the company. Keep in mind that the growth rate of the firm is the identified ability of a firm to grow its operations and the ROE is the return the company is able to earn on invested funds. The company's growth rate can be calculated as follows:
Formula 13.7
Growth rate = (retention rate)(ROE) 
Example: Estimate a dividend growth rate given ROE and retention rate
Newco assumes a constant ROE of 15%. The company anticipates a retention rate of 60% to fund new projects (indicating the firm will pay out 40% in dividends). What is Newco's dividend growth rate?
Answer:
g = (retention rate)(ROE)
g = (0.60)(0.15)
g = 0.09 or 9%

Investing Basics
Dividend Ratios: Payout And Retention
The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ... 
Stock Analysis
Microsoft Is Paying Dividends. Is Its Share Price Undervalued Or Overvalued Based On DDM? (MSFT)
How can you use the dividend discount model to estimate the value the common stock of Microsoft? 
Investing
Understanding Market Risk Premium
Market risk premium is equal to the expected return on an investment minus the riskfree rate. The riskfree rate is the minimum rate investors could expect to receive on an investment if it ... 
Investing Basics
Looking Deeper Into Capital Allocation
Discover how companies decide how to spend their cash in a variety of market conditions. 
Stock Analysis
High Return On Equity Businesses
Companies with high returns on equity usually see an increasing stock price in the future. 
Fundamental Analysis
Lessons On Corporate Dividend Payout And Retention Ratio
Why are dividend payout and retention ratios important to consider when investing in company stock? What companies have high ratios?What constitutes a high dividend payout and retention ratio? ... 
Investing Basics
How to Calculate Risk Premium
Think of a risk premium as a form of hazard pay for risky investments. 
Real Estate
How Interest Rates Affect Property Values
Along with their impact on mortgages, interest rates affect capital flows, the supply and demand for capital, and an investorâ€™s required rate of return. 
Stock Analysis
Analyzing Microsoft's Return on Equity (ROE) (MSFT)
Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry. 
Investing Basics
Understanding the DuPont Analysis
DuPont analysis measures assets at their gross book value, rather than at net book value, in order to produce a higher return on equity (ROE).

Retention Ratio
The proportion of earnings kept back in the business as retained ... 
Basket Retention
An insurance policy that covers exposures to several different ... 
Application Of Retention
Insurance contract language that specifies how much loss the ... 
Plowback Ratio
A fundamental analysis ratio that measures the amount of earnings ... 
Dividend Discount Model  DDM
A procedure for valuing the price of a stock by using predicted ... 
Complete Retention
A risk management technique in which a company facing risks decides ...

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