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...

...Rate and CAPM
The DividendDiscountModel equates the intrinsic value of the stock. If the intrinsic value is greater than the price in the market, then the stock (company) is undervalued and investors should look into purchasing the stock. This is ideal for valuing a stock for a specific period in the future. The equation is shown here:
This model is not usable as it has an infinite sum of variable cash flows. But, we can value the stock by using the Constant-Growth DDM. The Constant-Growth DividendDiscountModel takes the dividend of the company and divides it by the market capitalization rate, or the required return, minus growth:
This model assumes constant growth for all future dividends. The growth is calculated by multiplying Return on Equity and the b, the plowback ratio. The numerator uses the current dividend of the company and multiplies it by the constant growth rate. This would be known as D1. Return on equity can be calculated a number of ways, but the plowback is essentially the percentage of net income retained, or the percentage not paid out in dividends. The equation is shown here:
g=ROE x b
All components of the growth equation were found using Standard and Poor’s NetAdvantage. The ROE of Coca-Cola is 30.20% for the fiscal year 2009. The payout ratio is 56% so the plowback...

...Calculation Discursive 20% 80% Question 2 Dividend Valuation Model 45% 55% Question 3 Option strategies Straddles 80% 20% Question 4 Duration and convexity –Price – yield relationship 30% 70% Question 5 Option and Futures -mixed N/A 100% Question 6 CAPM 40% 60%
DividendDiscountModels 1. The intrinsic value, denoted V0, of a share of stock is defined as the present value of all cash payments to the investor in the stock, including dividends as well as the proceeds from the ultimate sale of the stock, discounted at the appropriate risk-adjusted interest rate, k. Whenever the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market price, the stock is considered undervalued and a good investment. 2. DividendDiscountModel: Stock valuation model that solves for the value of a common stock as the present value of future dividends expected to be received. 3. The dividenddiscountmodel holds that the price of a share of stock should equal the present value of all future dividends per share, discounted at an interest rate commensurate with the risk of the stock. 4. The constant growth dividenddiscountmodel is best suited for firms that are expected to exhibit stable growth rates...

...Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then – finance theory suggests – management should return some or all of the excess cash to shareholders as dividends. This is the general case, however there are exceptions. For example, shareholders of a "growth stock", expect that the company will, almost by definition, retain most of the excess earnings so as to fund future growth internally. By withholding current dividend payments to shareholders, managers of growth companies are hoping that dividend payments will be increased proportionality higher in the future, to offset the retainment of current earnings and the internal financing of present investment projects.
Management must also choose the form of the...

...Deriving the DividendDiscountModel in the Intermediate Microeconomics Class
Stephen Norman Jonathan Schlaudraff Karianne White Douglas Wills*
May 2012
Abstract This paper shows that the dividenddiscountmodel can be derived using the basic intertemporal consumption model that is introduced in a typical intermediate microeconomic course. This result will be of use to instructors who teach microeconomics to finance students in that it demonstrates the value of utility maximization in obtaining one of the first stock valuation models used in basic finance. Keywords: DividendDiscountModel, Intertemporal Consumption, Microeconomics Instruction, Finance Instruction JEL Codes: A22, D90, G12
*Stephen Norman: Assistant Professor, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: normanse@uw.edu. Jonathan Schlaudraff: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: jonathanschlaudraff@gmail.com. Karianne White: Student, University of Washington - Tacoma, 1900 Commerce Street, Tacoma, WA 98402, Phone: 253-692-4827, Fax: 253-692-4523, Email: karimarie84@yahoo.com. Douglas Wills (Corresponding Author): Associate Professor, University of Washington - Tacoma, 1900...

...Equity Valuation
Lecture Map
Definitions of Value
Book value, Liquidation value, Intrinsic value, Market value
Dividenddiscountmodels
Constant-growth
Multi-stage growth
Value Metrics and Determinants of Value
Current earnings and growth
P/E
Lesmond
1
Book Value of Equity
The firm’s equity value, or stock value, is
stated right on the firm’s books
This is NOT the market value of equity
Book value per share of Equity is the
value of common equity on the books,
divided by the number of shares
The value of Stockholder’s equity is in the
section of the balance sheet called Liabilities
and Owners’ Equity
Refer to the last set of pages for the Income
Statement, Balance Sheet, and CF Statement
Lesmond
2
Book Stockholder’s Equity
Derived from accounting rules
Simply the amount by which total assets exceed total
liabilities, where total assets are generally valued at purchase
price less depreciation
Some questions about the assets on the Balance Sheet?
Where is the
Where is the
property?
Where is the
employees?
Where is the
suppliers?
PV of the firm’s current projects?
value of the firm’s patents and other intellectual
value of the firm’s knowledge base, stored in its
value of the firm’s relationships with buyers and
Lesmond
3
Let’s check some numbers:
Assuming a price of $76.56 for Walmart as of September 4, 2014
Book Value of Equity?
Price to Book?
...

...The Dividend per share for 2013 and 2016 are given on Value Line. The dividend growth for the years in between is calculated as follows:
|Dividend ‘13 |.14 |
|Dividend ‘14 |.15 |
|Dividend ‘15 |.17 |
|Dividend ‘16 |.18 |
.18 - .14 = .04; .04/3 = .0133
In order to calculate Value using the 2 stage DividendDiscountModel we must calculate the market capitalization rate (k), as well as forecast the price of the stock for 2016 (P2016).
The market capitalization rate (k) can be calculated using the CAPM formula.
K = rf + β(market risk premium)
We are given a risk free rate of 1%, a beta of 1.45 and the RWJ book gives a market risk premium of 8.2%. By plugging the numbers we can solve for k.
K = 1% + 1.45(8.2%) = 12.89%
Next we need to forecast the price for the stock for the year 2016 (P2016). The first step in forecasting the price is to calculate the growth (g) rate of the stock.
g = ROE(1-dividend payout ratio)
The Value Line tear sheet gives us both the ROE (8.0%) and the dividend payout ratio (13%). By plugging in the numbers we can solve for g.
g = 8%(1-13%) = 6.96%
Now that we found the growth rate we can use it to forecast the future price of the stock in 2016....

...That’s because it has taken into account depreciation which is a non-cash charge. This ratio is considered as a measure of the firm’s ability to generate cash from operations and is used as a measure of cash flow available to meet financial obligations.
Profitability Ratio
Profitability is a measure of efficiency. It also indicates public acceptance of the product and shows that the firm can produce competitively. The profitability ratios measure the performance of profit of an enterprise. In other words the profitability ratios are designed to provide answers to questions such as what is the rate of profit? What is EPS? What is the rate of investment? What is the rate of equity? Is the profit earned by the enterprise adequate? What is the dividend payout ratio? What is retention ratio and so on? The analysis of the profitability ratio is important for the shareholders, creditors, prospective investors, bankers and the government alike. Gross profit margin ratio, return on investment, net profit margin ratio and operating profit ratio can be used to measure the liquidity position of the enterprise.
Profit margin: Profit margin ratio is the ratio of net profit to sales. It is known as profit margin. It is usually expressed as percentage. It is calculated as follows:
Net profit
Net profit ratio = ------------------------------------x 100
Sales
Here, net profit is the balance...

...will distribute cash to its shareholders by issuing a dividend or undertaking a stock repurchase. To issue a dividend, the firm’s board of directors must authorize the amount per share that will be paid on the declaration date. The firm pays the dividend to all shareholders of record on the record date. Because it takes three business days for shares to be registered, only shareholders who purchase the stock at least three days prior to the record date receive the dividend. As a result, the date two business days prior to the record date is known as the exdividend date; anyone who purchases the stock on or after the ex-dividend date will not receive the dividend. Finally, on the payable (or distribution) date, which is generally about a month after the record date, the firm pays the dividend. Just before the ex-dividend date, the stock is said to trade cum-dividend. After the stock goes ex-dividend, new buyers will not receive the current dividend, and the share price will reflect only the dividends in subsequent years. In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade exdividend. Most dividend-paying corporations pay them at quarterly intervals. Companies typically increase the...