Where is dividend yield in cost of equity?
Hi all, just wanted to clear up my confusion on this. I have read that dividend yield is factored into cost of equity through beta. But just taking a step back, if we were to derive beta based on a linear regression of a company's share price return against market returns, I am confused how dividend yield is factored into beta, especially if we derive the share price via a DCF which is based on free cash flow and does not account for dividends at all.
Free cash flow does account for dividends. FCFF and FCFE both contain cash flows that can be paid to equity holders (e.g. dividends).
I've not heard the notion that dividends are included in cost of equity through beta. Cost of equity is just theoretical anyway and one theory is dividend cap model which is basically just GGM rearranged for the cost of equity.
Another way to think about it is that when dividends are paid (or to be exact, when they go ex divi), stock prices move down in absolute terms by the $ amount of dividends or in % terms by the periodical dividend yield. So over time this is factored into the volatility of the stock and thus the beta.
Perferendis qui minus ea iste vero ut. Quia quia est doloribus unde. Reprehenderit minus culpa voluptates numquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...