Reading 23: Discounted Dividend Valuation

Question 1

When are dividends appropriate measure of cash flow?

Answer 1

• Company has a history of dividend payments
• Dividend policy is clear and related to the earnings of the firm
• Perspective is of a minority shareholder

Question 2

One-period DDM

Answer 2

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

Question 3

Two-period DDM

Answer 3

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

Question 4

Gordon Growth Model

Answer 4

-assumes dividends increase at a constant rate indefinitely

Vo = (Do x 1+g)/ (r-g)

Question 5

Present Value of Growth Opportunities

Answer 5

Vo = (E1/r) + PVGO

-present value of perpetual cash flow + present value of future investment opportunities

Question 6

Justified leading P/E

Answer 6

Po = E1

(D1/E1)/(r-g)

(1-b)/(r-g)

Question 7

Justified trailing P/E

Answer 7

Po/Eo

(Do x (1+g)/E0)/(r-g)

((1-b) x (1+g))/(r-g)

Question 8

H-model

Answer 8

Vo = (Do x (1+gL).(r-gL) + (Do x H x (gS - gL))/(r-gL)

Question 9

Sustainable growth rate

Answer 9

SGR = b x ROE

Question 10

ROE

Answer 10

(net income/sales) x (sales/total assets) x (total assets/stockholders equity)

Question 11

PRAT Model

Answer 11

g = (net income - dividends)/net income x (net income/sales) x (sales/total assets) x (total assets/stockholders equity)