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.

Model

Inputs from current financials

Net Income = $4,791.00 Book Value of Equity = $17,997.00 Current Earnings per share = $4.75 Current Dividends per share = $0.92 Number of shares outstanding = 1120.713 Do you want to normalize the net income/earnings per share? No Inputs for Discount Rate Beta of the stock = Riskfree rate= Risk Premium= Inputs for High Growth Period Length of high growth period Last year $15,518.00 (in currency) (in currency) (in currency) (in currency)

1.1500 5.00% 4.00%

(in percent) (in percent)

10

Enter the inputs for fundamental growth and book value of equity ROE = 30.87% Retention = 80.63% Do you want to change any of these inputs for the high growth period? Yes If yes, specify the values for these inputs (Please enter all variables) ROE = 25.00% Retention = 80.63% Do you want to change any of these inputs for the stable growth period? Yes If yes, specify the values for these inputs ROE = 15.00% Do you want me to gradually adjust your inputs during the second Yes half? Inputs for Stable Growth Period Enter growth rate in stable growth period? Stable payout ratio from fundamentals is = Do you want to change this payout ratio? If yes, enter the stable payout ratio= Will the beta to change in the stable period? If yes, enter the beta for stable period = Enter the risk premium to use in stable period =

(in percent) (in percent)

(in percent) (in percent)

(in percent)

5.00% 66.67% No

(in percent) (in percent) (Yes or No) (in percent) (Yes or No)

Yes 1.10 4.00%

Normalized Earnings Calculation

Choose the approach to normalized earnings Approach 1: Average Net Income over last 5 years Net Income Approach 2: Normalized return on equity Normalized ROE = 1 -5 $1,662.00 -4 $2,533.00 -3 $1,876.00 -2 $1,933.00

22%

ngs Calculation
Current $2,122.00 Average $2,025.20

Return on Equity = Retention Ratio = Expected growth rate = Cost of equity =

25.00% 80.63% 20.16% 9.60% 2 $5,406.20 $2,075.98 $3,330.22 1.20122 $2,772.38 $21,624.82 9.60% $2,075.98 25.00% $5,406.20 19.37% $1,047.10 $4,359.11 3 $6,495.98 $2,494.46 $4,001.52 1.31653 $3,039.44 $25,983.92 9.60% $2,494.46 25.00% $6,495.98 19.37% $1,258.17 $5,237.81 4 $7,805.43 $2,997.29 $4,808.15 1.44292 $3,332.23 $31,221.74 9.60% $2,997.29 25.00% $7,805.43 19.37% $1,511.79 $6,293.64 5 $9,378.85 $3,601.48 $5,777.37 1.58144 $3,653.23 $37,515.38 9.60% $3,601.48 25.00% $9,378.85 19.37% $1,816.53 $7,562.31 6 $10,367.87 $4,309.43 $6,058.44 1.73263 $3,496.68 $45,077.69 9.56% $4,309.43 23.00% $10,367.87 28.83% $2,988.86 $7,379.01

1 Net Income $4,499.25 - Equity Cost (see below) $1,727.71 Excess Equity Return $2,771.54 Terminal Value of Excess Equity Return Cumulated Cost of Equity 1.09600 Present Value $2,528.78 Beginning BV of Equity Cost of Equity Equity Cost Return on Equity Net Income Dividend Payout Ratio Dividends paid Retained Earnings $17,997.00 9.60% $1,727.71 25.00% $4,499.25 19.37% $871.43 $3,627.82

Equity Invested = $17,997.00 PV of Equity Excess Return = $65,993.76 Value of Equity = $83,990.76 Number of shares = 1120.713 Value Per Share = $74.94

7 $11,015.91 $4,993.88 $6,022.03 1.89757 $3,173.54 $52,456.70 9.52% $4,993.88 21.00% $11,015.91 38.29% $4,217.74 $6,798.17

8 $11,258.43 $5,617.36 $5,641.06 2.07746 $2,715.36 $59,254.87 9.48% $5,617.36 19.00% $11,258.43 47.75% $5,375.60 $5,882.82

9 $11,073.41 $6,149.00 $4,924.41 2.27357 $2,165.93 $65,137.70 9.44% $6,149.00 17.00% $11,073.41 57.21% $6,334.77 $4,738.64

10 Terminal Year $10,481.45 $11,005.52 $6,568.38 $6,896.79 $3,913.07 $4,108.73 $93,380.20 2.48729 $39,116.18 $69,876.34 9.40% $6,568.38 15.00% $10,481.45 66.67% $6,987.63 $3,493.82 $73,370.15 9.40% $6,896.79 15.00% $11,005.52 66.67%