Chapter 5 Flashcards
Dividend model fails when?
When valued firms have negative or volatile cash flows, or when dividends are not correlated with profitability.
Dividend discount models are ________ used today to value stocks.
Infrequently
The one-stage dividend discount model assumes ________
Constant growth in dividends in perpetuity
What is the formula for the one-stage dividend discount model?
Fair share price = dividend per share1 / R(equity) - g(terminal)
dividend per share1 = ?
dividend per share0 * (1 + g(terminal))
Assume that terminal growth rate = ?
risk-free rate
dividend per share0 = ?
total dividends paid / number of shares outstanding
Why does the dividend discount model fail?
Dividends are not a good measure of cash flows generated by corporations and total returns.
Valuations can be revisited by adding _________.
Buybacks, which are reported in the financing section of the statement of cash flows.
Formula for one-stage model with buybacks?
fair share price =
(dividend per share0 + buyback per share0) * (1+g(terminal)) / R(equity) - g(terminal)
Buyback per share = ?
buybacks / number or shares outstanding
Two-stage dividend discount model allows?
Allows us to incorporate assumptions about abnormal growth in the near years.
Formula for the two-stage model?
PV0 = D1/(1+Re)^1 + D2/(1+Re)^2 + D3/(1+Re)^3 + D4/(1+Re)^4 + D5/(1+Re)^5 + D6/ Re - g(terminal) / (1+Re)^5
D1-5 = ?
dividend per share0 * (1+gy1-y5)^T
D6 = ?
dividend per share0 * (1+gy1-y5)^5 * (1+g(terminal))^1
