In order to calculate Value using the 2 stage Dividend Discount Model 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.

P2016 = D2016(1+g)/(k-g)

We have already calculated the dividend for 2016, the market capitalization rate and the growth rate. By plugging in these numbers we can solve for P2016.

P2016 = .18(1.0696)/(.1289-.0696) = 3.24667

Now that we have calculated the dividends for the 4 years, the market capitalization rate and the forecasted stock price for 2016, we are ready to solve for the current value of the stock using the dividend discount model.

...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...

...Evaluation 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...

...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...

...DividenddiscountmodelDividenddiscountmodel (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.
FY 2002 2003 2004 2005 2006 2007F 2008F 2009F
Share price 0.155 0.150 0.230 0.370 0.450 0.450...

...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...

...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...

...Deal with rational for dividend according to MM Relevance theory, Walter's Model, Gordon’s Growth Model, Graham Dodd Model
Deal with rational for dividend according to MM Relevance theory, Walter's Model, Gordon’s Growth Model, Graham Dodd Model
Financial Management Assignment 2
Topic: Rational for Dividends
By Group 2:-
104 | Anshul Jain
105 | Bhaskar Jain...

...The dividend growth model approach limited application in practice because of its two assumptions.
It assumes that the dividend per share will grow at a constant rate, g, forever
The expected dividend growth rate, g, should be less than the cost of equity, Ke, to arrive at the simple growth formula.
The growth formula is,
Ke = (DIV1 / Po) + g
These assumptions imply that the dividend growth...