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# fcfeginzu - 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 works 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 = \$4,096.00 (in currency) Interest income from cash and marketable securities = \$132.00 Last year Book Value of Equity = \$12,072.00 \$10,237.00 (in currency) Cash and Marketable Securities \$2,475.00 \$1,918.00 Market Value of Equity = \$357,352.00 Number of shares outstanding = 6222.40 Current Capital Expenditures = \$11,986.00 Current Depreciation = \$9,767.00 Change in non-cash Working capital in most recent year = \$214.00 Net Debt Issued (Paid) during the year = (\$1,951.00) Do you want to normalize the net income/earnings per share? Yes Do you want to normalize your reinvestment needs? Yes If yes, these will be your normalized values Normalized Net Capital Expenditures = \$4,242.61 Normalized Working Capital Change = \$336.31 Normalized Net Debt issued = \$1,864.62 Inputs for Discount Rate Beta of the stock = 0.8 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?
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fcfeginzu - Dividend Discount Model Assumptions 1 The firm...

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