Discounted Dividend Valuation

Question 1

One-Period DDM

Answer 1

V0 = (D1 + P1) / (1+r)

Question 2

Two-Period DDM

Answer 2

V0 = D1 / (1+r)^1 + (D2 + P2) / (1+r)^2

Question 3

Multi-Period DDM

Answer 3

V0 = D1 / (1+r)^1 + D2 / (1+r)^2 + … + (Dn + Pn) / (1+r)^n

Question 4

Gordon Growth Model

Answer 4

Assumes dividends increase at constant rate indefinitely

Question 5

Gordon Growth Model

Answer 5

V0 = D0 * (1+g) / (r -g) = D1 / (r-g)

Question 6

Present Value of Growth Opportunities (PVGO)

Answer 6

Two sources of value:

a) present value of future dividends (with no growth
(b) present value of growth opportunities (PVGO)

Question 7

PVGO

Answer 7

V0 = (E / r) + PVGO

Question 8

Justified LEADING PE

Answer 8

Leading PE = P0 / E1 = (D1/E1) / (r-g) = ( 1 - b ) / ( r - g )

Question 9

Justified TRAILING PE

Answer 9

Trailing PE = P0 / E0 = [ [ D0 * (1+g) ] / E0 ] / (r - g) = (1-b)* (1+g) / ( r - g )

Question 10

b

Answer 10

retention ratio

Question 11

1 - b

Answer 11

dividend payout ratio

Question 12

Value of Perpetual Preferred Shares

Answer 12

V0 = Dp / rp

Question 13

Valuation using Two-Stage Model

Answer 13

V0 = [ SUM[ (D0 * (1+gs)^t) / (1+r)^t ] + D0*( (1+gs)^n * (1+gl) ) / (1+r)^n * (r -gl)

where:
gs = short term growth rate
gl = long term growth rate
n = length of high-growth period

Question 14

Valuation using H-Model

Answer 14

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

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

Question 15

Calculating required return on equity (GGM)

Answer 15

r = (D1 / P0) + g

dividend yield + growth rate

Question 16

Calculating required return on equity (H-Model)

Answer 16

r = [ (D0 / P0) * [ (1+gl) + [ H * (gs - gl) ] ] + gl

Question 17

Sustainable Growth Rate (SGR)

Answer 17

the rate at which earnings (and dividends) can continue to grow indefinitely, assuming firm’s D/E ratio is unchanged

Question 18

SGR

Answer 18

SGR = b * ROE

retention ratio * return on equity

Question 19

Calculating ROE (3-term Dupont)

Answer 19

ROE = NI / Stockholder Equity = ( NI / S ) + ( S / Total Assets ) + ( Total Assets / Stockholder Equity )

Question 20

PRAT Model

Answer 20

g = ( (NI - divs) / NI ) * ( NI / S ) * ( S / Total Assets) * ( Total Assets / Stockholders Equity )

Question 21

PRAT Model

Answer 21

SGR is a function of (P) profit margin, (R) retention rate, (A) asset turnover, and (T) total leverage

Question 22

Calculate SGR with PRAT

Answer 22

g = P * R * A * T