Dividend Discount Model: Constant Dividend

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Constant Dividends over Multiple Periods

Given the data below, compute the intrinsic value of the shares and determine if the stock is
priced in such a way that it presents an investing opportunity.

Inputs & Assumptions

Projected Annual Dividends $4 Stock's β 1.45
Number of Periods 1 RF 2.40%
E(Price) End of Holding Period $171 k (by the CAPM) 17.34%
E(RM) 12.70% Stock Price Today $142.40

Solution
By the formula:
𝑉_0=𝐷_1/(1+𝑘)+𝐷_2/(1+𝑘)^2 +…+(𝐷_𝐻+𝑃_𝐻)/(1+𝑘)^𝑡

1 2 3 4 5
Dividend Payment $ 4.00 $ - $ - $ - $ -
Expected End of Period Price $ 171.00 $ - $ - $ - $ -
PV of Dividend and Stock $ 149.15 $ - $ - $ - $ -
Sum = $ 149.15

Intrinsic Value = V0 =Present Value of Dividends and Share Price = $ 149.15

Given that the share price today is $142.40 and the intrinsic value is $149.15, the shares are
undervalued and perhaps represent a buying opportunity.

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Dividend Discount Model: Multistage Growth
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Multistage Dividend Growth

Given the data below, compute the intrinsic value of the shares and determine if the stock is
priced in such a way that it presents an investing opportunity.

Inputs & Assumptions

t=1 t=2 t=3 t=4 t=5
Projected Annual Dividends: $7 $10 $11 $13 $17
Periods of projected dividends: 5 Stock's β 1.27
Dividend growth rate g 5% RF 2.60%
Constant growth portion $251 k (by the CAPM) 12.13%
E(RM) 10.10% Stock Price Today $191.03

Solution
By the formula:
𝑉_0=𝐷_1/(1+𝑘)+𝐷_2/(1+𝑘)^2 +…+(𝐷_𝐻+𝐷_(𝐻+1)/(𝑘−𝑔))/(1+𝑘)^𝑡

1 2 3 4 5
Dividend Payment $ 7.00 $ 10.00 $ 11.00 $ 13.00 $ 17.00
Constant Growth Portion $ - $ - $ - $ - $ 250.53
PV of Dividend and Growth $ 6.24 $ 7.95 $ 7.80 $ 8.22 $ 150.96
Sum = $ 181.18

Intrinsic Value = V0 =Present Value of Dividends and Share Price = $ 181.18

Given that the share price today is $191.03 and the intrinsic value is $181.18, the shares are
overvalued and perhaps should be sold or shorted.

▲Top © Joseph Farizo