Presentation is loading. Please wait.

Presentation is loading. Please wait.

DISCOUNTED DIVIDEND VALUATION Presenter Venue Date.

Similar presentations


Presentation on theme: "DISCOUNTED DIVIDEND VALUATION Presenter Venue Date."— Presentation transcript:

1 DISCOUNTED DIVIDEND VALUATION Presenter Venue Date

2 DISCOUNTED CASH FLOW MODELS 2

3 CHOICE OF DISCOUNTED CASH FLOW MODELS 3

4 VALUING COMMON STOCK USING A MULTI-PERIOD DDM 4

5 EXAMPLE: VALUING COMMON STOCK USING A MULTPERIOD DDM 0123 D$1.00$1.05 $1.10 P$20.00

6 EXAMPLE: VALUING COMMON STOCK USING A MULTPERIOD DDM

7 VALUING COMMON STOCK USING THE GORDON GROWTH MODEL

8 EXAMPLE: VALUING COMMON STOCK USING THE GORDON GROWTH MODEL Risk-free rate3.0% Equity risk premium6.0% Beta1.20 Current dividend$2.00 Dividend growth rate5.0% Current stock price$24.00

9 VALUING COMMON STOCK USING THE GORDON GROWTH MODEL

10 EXAMPLE: VALUING PREFERRED STOCK

11 EXAMPLE: CALCULATING THE IMPLIED GROWTH RATE USING THE GORDON GROWTH MODEL Using the previous common stock example and the current stock price of $24, what is the implied growth rate?

12 CALCULATING THE IMPLIED REQUIRED RETURN USING THE GORDON GROWTH MODEL

13 EXAMPLE: CALCULATING THE IMPLIED REQUIRED RETURN USING THE GORDON GROWTH MODEL Using the previous common stock example and the current stock price of $24, what is the implied required return?

14 PRESENT VALUE OF GROWTH OPPORTUNITIES

15

16 EXAMPLE: PRESENT VALUE OF GROWTH OPPORTUNITIES Stock price$80.00 Expected earnings$5.00 Required return on stock10%

17 EXAMPLE: PRESENT VALUE OF GROWTH OPPORTUNITIES

18

19 USING THE GORDON GROWTH MODEL TO DERIVE A JUSTIFIED LEADING P/E

20 USING THE GORDON GROWTH MODEL TO DERIVE A JUSTIFIED TRAILING P/E

21 EXAMPLE: USING THE GORDON GROWTH MODEL TO DERIVE A JUSTIFIED P/E Stock price$50.00 Trailing earnings per share$4.00 Current dividends per share$1.60 Dividend growth rate5.0% Required return on stock9.0%

22 EXAMPLE: USING THE GORDON GROWTH MODEL TO DERIVE A JUSTIFIED LEADING P/E

23 EXAMPLE: USING THE GORDON GROWTH MODEL TO DERIVE A JUSTIFIED TRAILING P/E

24 ISSUES USING THE GORDON GROWTH MODEL Strengths Simple and applicable to stable, mature firms Can be applied to entire markets g can be estimated using macro data Can be applied to firms that repurchase stock Limitations Not applicable to non- dividend-paying firms g must be constant Stock value is very sensitive to r – g Most firms have nonconstant growth in dividends

25 CHOICE OF DISCOUNTED CASH FLOW MODELS Rapidly  earnings Heavy reinvestment Small or no dividends Growth Earnings growth slows Capital reinvestment slows FCFE & dividends  Transition ROE = r Earnings & dividends growth matures Gordon growth model useful Maturity

26 GENERAL TWO-STAGE DDM

27 EXAMPLE: GENERAL TWO-STAGE DDM Current dividend = $2.00 Growth Current dividend = $2.00 Growth for next three years = 15 percent Long-term growth = 4 percent Required return = 10 percent for next three years = 15 percent Long-term growth = 4 percent Required return = 10 percent

28 EXAMPLE: GENERAL TWO-STAGE DDM Step 1: Calculate the first three dividends: D1 = $2.00 x (1.15) = $2.30 D2 = $2.30 x (1.15) = $2.6450 D3 = $2.6450 x (1.15) = $3.0418 Step 2: Calculate the year 4 dividend: D4 = $3.0418 x (1.04) = $3.1634 Step 3: Calculate the value of the constant growth dividends: V3 = $3.1634 / (0.10 – 0.04) = $52.7237

29 EXAMPLE: GENERAL TWO-STAGE DDM

30 Using the previous example, now we’ll use the trailing P/E to determine the terminal value The D4 is $3.1634 Assume also that the projected P/E is 13.0 in year 4 and that the firm will pay out 60 percent of earnings as dividends Year 4 earnings are then $3.1634 / 0.60 = $5.2724 The stock price in year 4 is then $5.2724 × 13 = $68.54

31 EXAMPLE: GENERAL TWO-STAGE DDM

32 TWO-STAGE H-MODEL

33 EXAMPLE: TWO-STAGE H-MODEL Current dividend$3.00 gsgs 20% gLgL 6% H5 Required return on stock10% Current stock price$120

34 EXAMPLE: TWO-STAGE H-MODEL

35 SOLVING FOR THE REQUIRED RETURN USING THE TWO-STAGE H-MODEL

36 EXAMPLE: THREE-STAGE MODEL Firm pays a current dividend of $1.00 Growth rate is 20 percent for next two years Growth then declines over six years to stable rate of 5 percent Required return is 10 percent Current stock price is $50

37 THREE-STAGE MODEL Assumes three distinct growth stages: First stage of growth Second stage of growth Stable-growth phase H-model can be used for last two stages if growth declines linearly

38 THREE-STAGE MODEL EXAMPLE

39 ESTIMATING THE GROWTH RATE Industry or Macroeconomic Average g = b × ROE DuPont formula ROE = r ROE = industry ROE

40 THE SUSTAINABLE GROWTH RATE gbROE

41 THE DUPONT MODEL

42 EXAMPLE: DUPONT MODEL Net profit margin5.00% Total asset turnover1.5 Equity multiplier2.0 Retention ratio60%

43 EXAMPLE: DUPONT MODEL

44 Dividend discount models, free cash flow models, residual income models Dividend models most appropriate for Mature, profitable, dividend-paying firms Noncontrolling shareholder perspective Choice of Discounted Cash Flow Models Assumes constant g and r > g Applicable to mature, stable firms Estimated value very sensitive to r – g denominator Gordon Growth Model SUMMARY

45 Preferred stock valuation where g = 0 PVGO – Value from future growth Justified leading and trailing P/Es Implied r and g Uses of Gordon Growth Model Growth Transition Maturity Phases of Growth SUMMARY

46 General two-stage model: growth abruptly declines H-model: growth gradually declines Three-stage model: can utilize general or H-model Multistage Models g = Retention ratio × ROE DuPont analysis: ROE = Profit margin × Asset turnover × Equity multiplier Sustainable Growth Rate SUMMARY


Download ppt "DISCOUNTED DIVIDEND VALUATION Presenter Venue Date."

Similar presentations


Ads by Google