Dividend Discount Models

•OnePeriod Dividend Discount Model The value today of a share of stock is the present value of the expected dividend in Year 1, plus the present value of the expected price in Year 1. TwoPeriod Dividend Discount Model The value today of a share of stock is the present value of the expected dividends in Years 1 and 2, plus the present value of the expected price in Year 2.

Dividend Discount Models Valuation: 중앙대학교 경영학부 박창헌 교수 One-Period DDM • One-Period Dividend Discount Model The value today of a share of stock is the present value of the expected dividend in Year 1, plus the present value of the expected price in Year 1 One-Period DDM Two-Period DDM • Two-Period Dividend Discount Model The value today of a share of stock is the present value of the expected dividends in Years and 2, plus the present value of the expected price in Year Two-Period DDM Multi-Period DDM • Multi-Period Dividend Discount Model The value today of a share of stock is the present value of the expected dividends in Years through n, plus the present value of the expected price in Year n (the terminal value) (the terminal value) Multi-Period DDM Multi-Period DDM Warm-Up: The General Dividend Discount Model If we extend the holding period indefinitely, the value of a share of stock simply becomes the present value of an infinite stream of dividends, represented by John Burr Williams's original DDM formula: The Gordon Growth Model The Gordon growth model (GGM) assumes that dividends increase at a constant rate indefinitely +••• Valuation Using Spreadsheet Modeling (3 stage) 46 Valuation Using Spreadsheet Modeling (3 stage) 47 Valuation Using Spreadsheet Modeling (3 stage) N.B.: You are required to exercise the above three-stage DDM using spreadsheet 48 Sustainable Growth Rate (SGR) The sustainable growth rate (SGR) is the rate at which earnings (and dividends) can continue to grow indefinitely, assuming that the firm's debt-to-equity ratio is unchanged and it does not issue new equity SGR is a simple function of the earnings retention ratio and the return on equity: 49 Example: Calculating SGR 50 DuPont Analysis  The DuPont Method of Profitability Analysis Return on investment (ROI) can be decomposed: Source: Pearson Education 51 SGR and DuPont Analysis •ROE(return on equity) can be estimated with the DuPont formula: •SGR can be represented by the PRAT model, where SGR is a function of the profit margin (P), the retention rate (R), the asset turnover (A), and financial leverage (T) 52 Example: Calculating ROE and SGR (1) 53 Example: Calculating ROE and SGR (2) 54 Example: Calculating ROE and SGR (2) 55 Modifying the DDM to Include Stock Buybacks Source: Aswath Damodaran 56 Modifying the DDM to Include Stock Buybacks 57 Modifying the DDM to Include Stock Buybacks 58 Modifying the DDM to Include Stock Buybacks 59 This work is protected by copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted The work and materials from it should never be made available to students except by instructors using the accompanying texts published by Kaplan, Wiley and McGraw-Hill in their classes All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials ! 60 [...]... period in which growth will be lower but sustainable: (N.B., r is assumed to be the same for both periods.) 21 Example: Calculating value with a two-stage DDM Example: Valuing a non -dividend- paying stock Example: Valuing a non -dividend- paying stock Valuation Using the Two-Stage DDM (extended) 25 Valuation Using the Two-Stage DDM (extended) 26 Valuation Using the H-Model Example: An H-Model 27 Valuation... model: 16 Limitations of the Gordon Growth Model There are also some characteristics that limit the applications of the GGM: 17 Limitation of the Gordon Growth Model Consider a stock with an expected dividend per share next period of $2.50, a cost of equity of 15%, and an expected growth rate of 5% forever Then the value of the stock is: Value = $2.50/(0.15-0.05) = $25 Look at the sensitivity to estimates