goldman - Dividend Discount Model Assumptions 1. The firm...

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Dividend Discount Model Assumptions 1. The firm is expected to grow at a higher growth rate in the first period. 2. The growth rate will drop at the end of the first period to the stable growth rate. 3. The dividend payout ratio is consistent with the expected growth rate. Inputs needed 1. Length of high growth period 2. Expected growth rate in earnings during the high growth period. 3. Dividend payout ratio during the high growth period. 4. Expected growth rate in earnings during the stable growth period. 5. Expected payout ratio during the stable growth period. 6. Current Earnings per share 7. Inputs for the Cost of Equity How the model work The expected dividends are estimated for the high growth period, using the payout ratio for the high growth period and the expected growth rate in earnings per share. The expected growth rate is estimated either using fundamentals: Expected growth = Retention Ratio * Return on Equity Alternatively, you can input the expected growth rate. At the end of the high growth phase, the expected terminal price is estimated using dividends per share one year after the high growth period, using the growth rate in stable growth, the payout ratio in stable growth and the cost of equity in stable growth. The dividends per share and the terminal price are discounted back to the present at the cost of equity changes. If your cost of equity in stable growth is different from your cost of equity in high growth, the cost of equity in the second half of the stable growth period will be adjusted gradually from the high growth cost of equity to a stable growth cost of equity. Options Available You can make this model into a three stage model by answering yes to the question of whether you want me to adjust the inputs in the second half of the high growth period. If you do, I will adjust the growth rate, the payout ratio and the cost of equity from high-growth levels to stable growth levels gradually. You can also make this a stable growth model by setting the high growth period to zero.
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Inputs from current financials Net Income = $4,972.32 Last year (in currency) Book Value of Equity = $29,000.00 $26,888.00 (in currency) Current Earnings per share = $11.03 (in currency) Current Dividends per share = $1.00 (in currency) Do you want to normalize the net income/earnings per share? No Inputs for Discount Rate Beta of the stock = 1.2 Riskfree rate= 4.50% (in percent) Risk Premium= 4.00% (in percent) Inputs for High Growth Period Length of high growth period 5 Do you want to calculate the growth rate from fundamentals? Yes (Yes or No) If no, enter the expected growth rate in earnings in high grow 3% If yes, the following will be the inputs to the fundamental growth formulation: ROE = 18.49% (in percent) Retention = 90.93% (in percent) Do you want to change any of these inputs for the high grow No If yes, specify the values for these inputs (Please enter all variables) ROE = 15.00% (in percent) Retention = 85.00% (in percent) Do you want to change any of these inputs for the stable grow
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This note was uploaded on 12/04/2011 for the course ECON 001 taught by Professor Tnaga during the Spring '11 term at Abant İzzet Baysal University.

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goldman - Dividend Discount Model Assumptions 1. The firm...

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