Discounted Dividend Valuation

Question 0

Calc Gordon Growth Model

Answer 0

V0 = D0(1+g) = D1
———- —-
r - g r - g

Question 1

Four versions of multi period DDM

Answer 1

Gordon growth model
2-stage growth model
H-model
3-stage growth mkdel

Question 2

Calc present value of growth opportunities

Answer 2

V0 = E/r + PVGO

Plug in current market price, calculate implied PVGO

Question 3

When is Gordon growth model most appropriate and what are limitations

Answer 3

Mature stable firms

Limits - sensitive to r and g estimates
Assumes dividends being paid now
Unpredictable growth patterns make it difficult to use

Question 4

Calc Two stage growth model

Answer 4

V0 = PV dividends, high growth + PV terminal value (at lower growth)
= sum(D0(1+gs)^t/(1+r)^t) +(D0(1+gs)^n(1+gl))/((1+r)^n*(r-gl))

Term value calculated with Gordon or market multiple approach

Question 5

Calc H model

Answer 5

V0 = D0(1+gl) / (r-gl) + D0H*(gs-gl) / (r-gl)

H = t/2 (half life of high growth period)

Question 6

Solve for required rate of return using Gordon growth

Answer 6

r = D1 + g
—
P0

Question 7

Calculate sustainable growth rate (g) using DuPont formula

Answer 7

g = (NI - div)/NI * NI/sales * (sales/assets) * (assets/equity)

Question 8

Another word for DuPont formula

Answer 8

PRAT model

Profit margin * retention rate * asset turnover * degree financial leverage

Question 9

Calculate g (not using PRAT)

Answer 9

g = ROE*b

Question 10

Calculate g (not using PRAT)

Answer 10

g = ROE*b