DDM Flashcards
1
Q
FORMULA: DDM
A
P0=∑(t=1)^∞ Div/(1+ke)^t =DPS/(ke-g)
2
Q
How to estimate growth rates?
A
- Historical growth
- Analysts estimates: follow market capitalization, institutional holding, trading volume but can make errors
- Fundamentals: growth in equity earnings, growth in operating income
3
Q
Common errors between analysts in estimating g
A
tunnel vision lemmingitis stockholm syndrome factophobia Dr Jekyll/Mr Hyde
4
Q
FORMULAS: Growth rate (g)
A
g=RR x ROE=Equity Reinvestment rate x ROE
g=Net reinvestment rate x ROCE
5
Q
FORMULA: Net Reinvestment Rate
A
Net Reinvestment rate= (CAPEX-D&A+ ∆WC)/(EBIT (1-Tax rate))
6
Q
Terminal Value estimates
A
Liquidation value
Multiple approach
Stable growth model (Exp Cash flow next period/k-g)
7
Q
Prerequisites to use DDM
A
predictability
well-established div policy
pays most of EPS.
8
Q
Growth rate features
A
g cannot be higher than the growth rate of the economy, it can be negative
small changes of it can change the valuation significantly.
9
Q
High growth companies
A
low dividends high risk high ROCE high net capex low leverage
10
Q
Stable growth companies
A
high dividends average risk ROCE closer to WACC lower Net Capex leverage closer to industry average.
11
Q
Why firms usually tend to pay less dividends?
A
stability investment needs tax factors signaling managerial self-interest
