dividend capitalization model

Method for estimating a firm's cost of common (ordinary) equity. This approach approximates a future dividend stream based on the firm's dividend history and an assumed growth rate, and computes the market capitalization rate that equates it with the current market price. In the case of closely-held firms (such as sole proprietorships and partnerships) which do usually not distribute profits as dividends, the firms dividend paying capacity is estimated from its average net income and average cash flow and compared with the dividends actually paid by a similar size firm. Also called dividend growth model. See also capital asset pricing model (CAPM).