DividendDiscountModel

Assumptions 1.Thefirmisexpectedtogrowatahighergrowthrateinthefirstperiod.
2.Thegrowthratewilldropattheendofthefirstperiodtothestablegrowthrate.
3.Thedividendpayoutratioisconsistentwiththeexpectedgrowthrate.
Inputsneeded 1.Lengthofhighgrowthperiod
2.Expectedgrowthrateinearningsduringthehighgrowthperiod.
3.Dividendpayoutratioduringthehighgrowthperiod.
4.Expectedgrowthrateinearningsduringthestablegrowthperiod.
5.Expectedpayoutratioduringthestablegrowthperiod.
6.CurrentEarningspershare
7.InputsfortheCostofEquity
Howthemodelworks Theexpecteddividendsareestimatedforthehighgrowthperiod,usingthepayout
ratioforthehighgrowthperiodandtheexpectedgrowthrateinearningspershare.
Theexpectedgrowthrateisestimatedeitherusingfundamentals:
Expectedgrowth=RetentionRatio*ReturnonEquity
Alternatively,youcaninputtheexpectedgrowthrate.
Attheendofthehighgrowthphase,theexpectedterminalpriceisestimatedusing
dividendspershareoneyearafterthehighgrowthperiod,usingthegrowthrate
instablegrowth,thepayoutratioinstablegrowthandthecostofequityinstable
growth.
Thedividendspershareandtheterminalpricearediscountedbacktothepresentat
thecostofequitychanges.
Ifyourcostofequityinstablegrowthisdifferentfromyourcostofequityinhigh
growth,thecostofequityinthesecondhalfofthestablegrowthperiodwillbe
adjustedgraduallyfromthehighgrowthcostofequitytoastablegrowthcostof
equity.
OptionsAvailable Youcanmakethismodelintoathreestagemodelbyansweringyestothequestion
ofwhetheryouwantmetoadjusttheinputsinthesecondhalfofthehighgrowth
period.Ifyoudo,Iwilladjustthegrowthrate,thepayoutratioandthecostof
equityfromhighgrowthlevelstostablegrowthlevelsgradually.
Youcanalsomakethisastablegrowthmodelbysettingthehigh
growthperiodtozero.
ountModel
Inputsfromcurrentfinancials
NetIncome= $3,542.00 Lastyear (incurrency)
BookValueofEquity= $12,287.00 $12,058.00 (incurrency)
CurrentEarningspershare= $3.00 (incurrency)
CurrentDividendspershare= $1.37 (incurrency)
Doyouwanttonormalizethenetincome/earningspershare? No

InputsforDiscountRate
Betaofthestock= 0.85
Riskfreerate= 5.40% (inpercent)
RiskPremium= 4.00% (inpercent)

InputsforHighGrowthPeriod
Lengthofhighgrowthperiod 5

Doyouwanttocalculatethegrowthratefromfundamentals? Yes (YesorNo)

Ifno,entertheexpectedgrowthrateinearningsinhighgrowthperiod=
Ifyes,thefollowingwillbetheinputstothefundamentalgrowthformulation:
ROE= 29.37% (inpercent)
Retention= 54.33% (inpercent)
Doyouwanttochangeanyoftheseinputsforthehighgrowthperio Yes
Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROE= 25.00% (inpercent)
Retention= 54.33% (inpercent)
Doyouwanttochangeanyoftheseinputsforthestablegrowthperi Yes
Ifyes,specifythevaluesfortheseinputs
ROE= 15.00% (inpercent)

Doyouwantmetograduallyadjustyourinputsduringthesecondha No

InputsforStableGrowthPeriod
Entergrowthrateinstablegrowthperiod? 5.00% (inpercent)

Stablepayoutratiofromfundamentalsis= 66.67% (inpercent)

Doyouwanttochangethispayoutratio? No (YesorNo)
Ifyes,enterthestablepayoutratio= (inpercent)

Willthebetatochangeinthestableperiod? Yes (YesorNo)

Ifyes,enterthebetaforstableperiod= 1.00
Entertheriskpremiumtouseinstableperiod= 4.00%
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 NormalizedEarningsCalculation
Choosetheapproachtonormalizedearnings 1
Approach1:AverageNetIncomeoverlast5years
5 4 3 2
NetIncome $1,662.00 $2,533.00 $1,876.00 $1,933.00

Approach2:Normalizedreturnonequity
NormalizedROE= 22%
sCalculation

Current Average
$2,122.00 $2,025.20
Year EPS DPS Present Value
1 $3.41 $1.56 $1.43
2 $3.87 $1.77 $1.49
3 $4.40 $2.01 $1.56
4 $4.99 $2.28 $1.63
5 $5.67 $2.59 $1.70
Sum $7.81
 Two-Stage Dividend Discount Model

Outputfromtheprogram
CostofEquity= 8.80%

NetIncome= $3,542

EarningsperShare= $3.00

GrowthrateinEPS= 13.58%
PayoutRatioforhighgrowthphase= 45.67%

Thedividendsforthehighgrowthphaseareshownbelow(upto10years)
1 2 3 4

ExpectedGrowthRate 13.58% 13.58% 13.58% 13.58%

Earningspershare $3.41 $3.87 $4.40 $4.99

Payoutratio 45.67% 45.67% 45.67% 45.67%

Dividendspershare $1.56 $1.77 $2.01 $2.28

CostofEquity 8.80% 8.80% 8.80% 8.80%

CumulativeCostofEquity 108.80% 118.37% 128.79% 140.12%

PresentValue $1.43 $1.49 $1.56 $1.63

GrowthRateinStablePhase= 5.00%

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 Two-Stage Dividend Discount Model

PayoutRatioinStablePhase= 66.67%

CostofEquityinStablePhase= 9.40%
Priceattheendofgrowthphase= $90.23

PresentValueofdividendsinhighgrowthphase= $7.81

PresentValueofTerminalPrice= $59.18

Valueofthestock= $66.99

Estimatingthevalueofgrowth
Valueofassetsinplace= $31.91

Valueofstablegrowth= $15.81

Valueofextraordinarygrowth= $19.26

Valueofthestock= $66.99

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 Two-Stage Dividend Discount Model

am

13.58%

$5.67

45.67%

$2.59

8.80%

152.46%

$1.70

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 Two-Stage Dividend Discount Model

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