# Dividend Discount Model

Pages: 3 (612 words) Published: March 3, 2008
Dividend discount model

Dividend discount model (DDM) is a way of valuing a share based on the net present value of the dividends that you expect to receive in the future. According to the DDM, dividends are the cash flows that are returned to the shareholder.

FY200220032004200520062007F2008F2009F
Share price0.1550.1500.2300.3700.4500.450
Dividends per share 0.0050.0120.0140.0120.0130.0190.01780.020 Dividend Growth0.08330.2580.0140.014

Dividend rates are expected to grow for FY2007 to \$0.019 excluding the special dividend, and then grow at a constant rate for the next 2 years at a rate of 14%.

Forecasted Dividend Growth Rate =
= 3
=0.14

According to the DDM, where dividends are expected to grow at a constant rate and the holding is perpetual, the value of the share is:
Where g is the dividend growth rate and r > g

Therefore,
P2007 =
P2007 =
P2007 = \$0.37

Our assumptions

1.Shareholders' required rate of return, r remains constant at 18.77% from 2006 to 2008. 2.Dividends per share have been forecasted to increase to \$0.19 in 2007 (exclusive of special dividend) 3.Dividend growth rate of 14% will be constant only for the next 2 years from year 2008 and 2009.

Analysis
In the DDM valuation model, Shareholders' required rate of return, Re is assumed to be constant at 18.77% from 2006 to 2008 where dividends are assumed to grow at 14%. The required rate return derived from historical price was 18.77% so we expect the beta to be same for the up coming 2 years, therefore we expect same Re for year 2007 and 2008.

Also, dividends per share for FY 2007 have been forecasted to increase to \$0.019 assuming payout ratio to be 68%. s a result, net profit attributable to equity holders of the company improved by 130% from \$3.9 million to \$8.9 million.

Cash and cash equivalents decreased by \$5.1 million in HY2007. The reduction in cash and cash equivalents arose...