DividendDiscountModel

Assumptions 1.Thefirmisexpectedtogrowatahighergrowthrateinthefirstperiod.
2.Thegrowthratewilldropattheendofthefirstperiodtothestablegrowthrate.
3.Thedividendpayoutratioisconsistentwiththeexpectedgrowthrate.
Inputsneeded 1.Lengthofhighgrowthperiod
2.Expectedgrowthrateinearningsduringthehighgrowthperiod.
3.Dividendpayoutratioduringthehighgrowthperiod.
4.Expectedgrowthrateinearningsduringthestablegrowthperiod.
5.Expectedpayoutratioduringthestablegrowthperiod.
6.CurrentEarningspershare
7.InputsfortheCostofEquity
Howthemodelworks Theexpecteddividendsareestimatedforthehighgrowthperiod,usingthepayout
ratioforthehighgrowthperiodandtheexpectedgrowthrateinearningspershare.
Theexpectedgrowthrateisestimatedeitherusingfundamentals:
Expectedgrowth=RetentionRatio*ReturnonEquity
Alternatively,youcaninputtheexpectedgrowthrate.
Attheendofthehighgrowthphase,theexpectedterminalpriceisestimatedusing
dividendspershareoneyearafterthehighgrowthperiod,usingthegrowthrate
instablegrowth,thepayoutratioinstablegrowthandthecostofequityinstable
growth.
Thedividendspershareandtheterminalpricearediscountedbacktothepresentat
thecostofequitychanges.
Ifyourcostofequityinstablegrowthisdifferentfromyourcostofequityinhigh
growth,thecostofequityinthesecondhalfofthestablegrowthperiodwillbe
adjustedgraduallyfromthehighgrowthcostofequitytoastablegrowthcostof
equity.
OptionsAvailable Youcanmakethismodelintoathreestagemodelbyansweringyestothequestion
ofwhetheryouwantmetoadjusttheinputsinthesecondhalfofthehighgrowth
period.Ifyoudo,Iwilladjustthegrowthrate,thepayoutratioandthecostof
equityfromhighgrowthlevelstostablegrowthlevelsgradually.
Youcanalsomakethisastablegrowthmodelbysettingthehigh
growthperiodtozero.
countModel
Inputsfromcurrentfinancials
NetIncome= $4,791.00 Lastyear (incurrency)
BookValueofEquity= $17,997.00 $15,518.00 (incurrency)
CurrentEarningspershare= $4.75 (incurrency)
CurrentDividendspershare= $0.92 (incurrency)
Numberofsharesoutstanding= 1120.713
Doyouwanttonormalizethenetincome/earningspershare? No

InputsforDiscountRate
Betaofthestock= 1.1500
Riskfreerate= 5.00% (inpercent)
RiskPremium= 4.00% (inpercent)

InputsforHighGrowthPeriod
Lengthofhighgrowthperiod 10

Entertheinputsforfundamentalgrowthandbookvalueofequity
ROE= 30.87% (inpercent)
Retention= 80.63% (inpercent)
Doyouwanttochangeanyoftheseinputsforthehighgrowthperiod Yes
Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROE= 25.00% (inpercent)
Retention= 80.63% (inpercent)
Doyouwanttochangeanyoftheseinputsforthestablegrowthperi Yes
Ifyes,specifythevaluesfortheseinputs
ROE= 15.00% (inpercent)

Doyouwantmetograduallyadjustyourinputsduringthesecondha Yes

InputsforStableGrowthPeriod
Entergrowthrateinstablegrowthperiod? 5.00% (inpercent)

Stablepayoutratiofromfundamentalsis= 66.67% (inpercent)

Doyouwanttochangethispayoutratio? No (YesorNo)
Ifyes,enterthestablepayoutratio= (inpercent)

Willthebetatochangeinthestableperiod? Yes (YesorNo)

Ifyes,enterthebetaforstableperiod= 1.10
Entertheriskpremiumtouseinstableperiod= 4.00%
 NormalizedEarningsCalculation
Choosetheapproachtonormalizedearnings 1
Approach1:AverageNetIncomeoverlast5years
5 4 3
NetIncome $1,662.00 $2,533.00 $1,876.00

Approach2:Normalizedreturnonequity
NormalizedROE= 22%
lizedEarningsCalculation

2 Current Average
$1,933.00 $2,122.00 $2,025.20
ReturnonEquity= 25.00%
RetentionRatio= 80.63%
Expectedgrowthrate= 20.16%
Costofequity= 9.60%

1 2 3 4 5
NetIncome $4,499.25 $5,406.20 $6,495.98 $7,805.43 $9,378.85
EquityCost(seebelow) $1,727.71 $2,075.98 $2,494.46 $2,997.29 $3,601.48
ExcessEquityReturn $2,771.54 $3,330.22 $4,001.52 $4,808.15 $5,777.37
TerminalValueofExcessEq
CumulatedCostofEquity 1.09600 1.20122 1.31653 1.44292 1.58144
PresentValue $2,528.78 $2,772.38 $3,039.44 $3,332.23 $3,653.23

BeginningBVofEquity $17,997.00 $21,624.82 $25,983.92 $31,221.74 $37,515.38

CostofEquity 9.60% 9.60% 9.60% 9.60% 9.60%
EquityCost $1,727.71 $2,075.98 $2,494.46 $2,997.29 $3,601.48

ReturnonEquity 25.00% 25.00% 25.00% 25.00% 25.00%

NetIncome $4,499.25 $5,406.20 $6,495.98 $7,805.43 $9,378.85
DividendPayoutRatio 19.37% 19.37% 19.37% 19.37% 19.37%
Dividendspaid $871.43 $1,047.10 $1,258.17 $1,511.79 $1,816.53
RetainedEarnings $3,627.82 $4,359.11 $5,237.81 $6,293.64 $7,562.31

EquityInvested= $17,997.00
PVofEquityExcessReturn= $65,993.76
ValueofEquity= $83,990.76
Numberofshares= 1120.713
ValuePerShare= $74.94
 6 7 8 9 10 TerminalYear
$10,367.87 $11,015.91 $11,258.43 $11,073.41 $10,481.45 $11,005.52
$4,309.43 $4,993.88 $5,617.36 $6,149.00 $6,568.38 $6,896.79
$6,058.44 $6,022.03 $5,641.06 $4,924.41 $3,913.07 $4,108.73
$93,380.20
1.73263 1.89757 2.07746 2.27357 2.48729
$3,496.68 $3,173.54 $2,715.36 $2,165.93 $39,116.18

$45,077.69 $52,456.70 $59,254.87 $65,137.70 $69,876.34 $73,370.15

9.56% 9.52% 9.48% 9.44% 9.40% 9.40%
$4,309.43 $4,993.88 $5,617.36 $6,149.00 $6,568.38 $6,896.79

23.00% 21.00% 19.00% 17.00% 15.00% 15.00%

$10,367.87 $11,015.91 $11,258.43 $11,073.41 $10,481.45 $11,005.52
28.83% 38.29% 47.75% 57.21% 66.67% 66.67%
$2,988.86 $4,217.74 $5,375.60 $6,334.77 $6,987.63
$7,379.01 $6,798.17 $5,882.82 $4,738.64 $3,493.82