Accounting and capital markets

In the above assessment, the expected value of dividend for 2013 has been measured by taking into account a dividend growth rate that has been proposed by board of each company which is atleast few percentage above the prevailing inflation rate. The expected value has been calculated using Gordon’s formula: D1=D0 (1+g). where g is the dividend growth rate. The dividend growth rates have been sourced from annual report of each company for 2012 (Pennon Group Plc, 2012. Severn Trent, 2012. United Utilities, 2012. National Grid, 2012).
The risk free return value has been obtained by taking into account yield on 10 year UK government bonds. It was considered risk free because only government bond investments are considered absolutely safe. The data has been sourced from Open Knowledge (2015) and annual value has been taken into account. The beta represents systematic risk of an organisation. In this paper, the beta value of each company against all FTSE shares has been considered (Caldwell, 2013).
The price earnings (P/E) ratio reflects healthy prospects of a company in the stock market. It is calculated as: Market price of share/ Earning per Share. As per instruction of the paper, the market price of share of each company has been calculated on 01 October 2012. However, the EPS value was measured from the respective annual reports. The expected market return has been calculated as reverse of the price earnings ratio. The cost of equity herein has been calculated as: Ke = Rf + β * (Rm – Rf) and
Stock valuation can be largely categorised as absolute valuation model and relative valuation model. For absolute valuation, the paper has considered dividend discount model. One of the important dividend models is Gordon’s dividend growth model. This model is essentially utilised for valuation of equity stocks and is based on the notion that