Dividend Discount Model

Dividend Discount Model - Valuation: Dividend Discount...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Valuation: Dividend Discount Model
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Dividend Discount Model (DDM) Equates the value of company equity with the present value of all future dividends Dividends are viewed similar to coupon payments on debt Discount rate is the cost of equity capital 2
Background image of page 2
Recursive Process of Valuation Value of equity at the end of period 3 IV0 = Dividends to be received during period 1 D1 + IV1 1 + re = + Intrinsic value of equity at the beginning of period one 1 + Cost of equity The stock price today depends on the expected price of the stock tomorrow, which in turn depends on the expected price of the stock the day after. Value of equity at the end of period
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Recursive Process of Valuation Example Eastern Company has an expected dividend for period 1 of $1.50, and its expected intrinsic value of equity at the end of period 1 is $32. The cost of equity capital for similar firms is 7.6%. What is today’s intrinsic value? 4 IV0 = D1 + IV1 1 + re IV0 = $1.50 + $32 1.076 = $31.13
Background image of page 4
Dividend Discount Model Framework Equates current stock price to the present value of all future expected dividends 5 § Two methods to forecast future dividends through infinity § Perpetuity method § Constant growth method IV0 = D1 1 + re D2 (1 + re)2 + D3 (1 + re)3 + D4 (1 + re)4 + + …
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Dividend Discount Model with Constant Perpetuity Assumes that forecasted dividends stabilize at some point in the future and remain constant thereafter Yields an ordinary annuity with payments occurring at the end of a period through infinity 6 IV0 = D1 re
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/21/2011 for the course BMGT 313F taught by Professor Seybert during the Fall '11 term at Maryland.

Page1 / 18

Dividend Discount Model - Valuation: Dividend Discount...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online