The Dividend Decision If there are not enough investments that earn the hurdle

# The dividend decision if there are not enough

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The Dividend Decision If there are not enough investments that earn the hurdle rate, return the cash to the owners Current EBIT(1-t) = \$3,558 million Return on Capital 20.00% Reinvestment Rate 50% Expected Growth = ROC * RR = .50 * 20%= 10% Cost of Capit 12.22% Determine the business risk of the firm (Beta, Default Risk) Equity: Beta=1.25 In stable growt Reinvestment Return on Cap Beta = 1.00 Debt Ratio = 3 Cost of Capita Transition to stable growth inputs Year EBIT(1-t) Reinvestment FCFF Terminal Value PV 1 3,914 \$ 1,947 \$ 1,966 \$ 1,752 \$ 2 4,305 \$ 2,142 \$ 2,163 \$ 1,717 \$ 3 4,735 \$ 2,356 \$ 2,379 \$ 1,682 \$ 4 5,209 \$ 2,343 \$ 2,866 \$ 1,649 \$ 5 5,730 \$ 2,851 \$ 2,879 \$ 1,616 \$ 6 6,344 \$ 2,974 \$ 3,370 \$ 1,692 \$ 7 6,957 \$ 2,762 \$ 4,196 \$ 1,773 \$ 8 7,558 \$ 3,006 \$ 4,552 \$ 1,849 \$ 9 8,132 \$ 2,904 \$ 5,228 \$ 1,920 \$ 10 8,665 \$ 2,708 \$ 5,957 \$ 120,521 \$ 42,167 \$ 57,817 \$ \$11,180 46,637 \$ 69.08 \$ Value of Disney = = Value of Equity - Value of Debt = Value of Disney/share =
Aswath Damodaran 60 Relative Valuation n In relative valuation, the value of an asset is derived from the pricing of 'comparable' assets, standardized using a common variable such as earnings, cashflows, book value or revenues. Examples include -- Price/Earnings (P/E) ratios and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples) Price/Book (P/BV) ratios and variants (Tobin's Q) Price/Sales ratios
Aswath Damodaran 61 MULTIPLES AND DCF VALUATION n Gordon Growth Model: n Dividing both sides by the earnings, n Dividing both sides by the book value of equity, n If the return on equity is written in terms of the retention ratio and the expected growth rate n Dividing by the Sales per share, P 0 = DPS 1 r - g n P 0 EPS 0 = PE = Payout Ratio*(1 + g n ) r-g n P 0 BV 0 = PBV = ROE - g n r-g n P 0 BV 0 = PBV = ROE*Payout Ratio*(1 + g n ) r-g n P 0 Sales 0 = PS = Profit Margin*Payout Ratio*(1 + g n ) r-g n
Aswath Damodaran 62 Disney: Relative Valuation Company PE Expected Growth PEG King World Productions 10.4 7.00% 1.49 Aztar 11.9 12.00% 0.99 Viacom 12.1 18.00% 0.67 All American Communications 15.8 20.00% 0.79 GC Companies 20.2 15.00% 1.35 Circus Circus Enterprises 20.8 17.00% 1.22 Polygram NV ADR 22.6 13.00% 1.74 Regal Cinemas 25.8 23.00% 1.12 Walt Disney 27.9 18.00% 1.55 AMC Entertainment 29.5 20.00% 1.48 Premier Parks 32.9 28.00% 1.18 Family Golf Centers 33.1 36.00% 0.92 CINAR Films 48.4 25.00% 1.94 Average 27.44 18.56% 1.20
Aswath Damodaran 63 Is Disney fairly valued? n Based upon the PE ratio, is Disney under, over or correctly valued? o Under Valued o Over Valued o Correctly Valued n Based upon the PEG ratio, is Disney under valued? o Under Valued o Over Valued o Correctly Valued n Will this valuation give you a higher or lower valuation than the discounted CF valutaion? o Higher o Lower
Aswath Damodaran 64 Relative Valuation Assumptions n Assume that you are reading an equity research report where a buy recommendation for a company is being based upon the fact that its PE ratio is lower than the average for the industry. Implicitly, what is the underlying assumption or assumptions being made by this analyst? o The sector itself is, on average, fairly priced o The earnings of the firms in the group are being measured consistently o The firms in the group are all of equivalent risk o The firms in the group are all at the same stage in the growth cycle o The firms in the group are of equivalent risk and have similar cash flow patterns o All of the above
Aswath Damodaran 65 First Principles n Invest in projects that

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