13dividend Discount Model V3

Dividend Discount Model copyright THC 2003. All rights reserved by Thomas Ho Company, New York, NY.
. USA www. thomasho.com tom.ho@thomasho.com

reference number 6 classification # 20801
Version V3 level basic Instructions
publication date Jul-03 1. The present value concept enables us to value assets with uncertain returns.
author Hanyang Financial Engineering Lab.
affiliation Hanyang University input cost of equity, growth rate for the next 5 years, growth rate from year 6, dividend per share this year
email address leesb@hanyang.ac.kr output stock price
last revised date Apr-04
references Gordon, M., 1962, The Investment, Financing, and Valuation of the Corporation, Irwin, Homewood, IL.
Ch. 2 of "The Oxford Guide to Financial Modeling" by Thomas S.Y. Ho and Sang Bin Lee, 2004, Oxford University Press
Descriptions
financial model class equity market
issuer/modeler practitioner
model type the stock model - dividend discount model
risk sources asset return
risk distribution normal
economic assumptions perfect capital market
technical assumptions annual compounding
key words present value, cash flow
Links
data N/A
financial models http://pages.stern.nyu.edu/~adamodar/
CAPM
Inputs
Cost of Equity 0.16
Growth rate for the next 3 years 0.18
Growth rate from year 4 0.06
DPS
1
2
Outputs
Stock price 24.173603
Interim Calculations
1 2 3 4
DPS 2 2.36 2.7848 2.951888
copyright THC 2003. All rights reserved by Thomas Ho Company, New York, NY. USA www. thomasho.com tom.ho@thomasho.com
1. The present value concept enables us to value assets with uncertain returns.
cost of equity, growth rate for the next 5 years, growth rate from year 6, dividend per share this year
Gordon, M., 1962, The Investment, Financing, and Valuation of the Corporation, Irwin, Homewood, IL.
Dividend Discount Model copyright THC 2003. All rights reserved by Thomas Ho Company, New York, NY. USA www. thomasho.com tom.ho@thomasho.com
Version 1.0 level basic Instructions
affiliation Hanyang University input cost of equity, EPS1, DPS1, ROE
email address leesb@hanyang.ac.kr output stock price, PVGO
Descriptions
Links
data N/A
CAPM
Inputs
Cost of Equity 0.15
EPS at year 1 7
DPS at year 1 5
ROE 0.2
Outputs
Stock price 53.846154
7.1794872 = NPV
1
/(K
e
-g)
7.1794872 = DPS
1
/(K
e
-g)-EPS
1
/K
e
Interim calculation
growth rate 0.0571429
1 2 3 4 5
Plowback amount 2 2.1142857 2.235102 2.3628222 2.4978406
the perpetual cash flow 0.4 0.4228571 0.4470204 0.4725644 0.4995681
NPV of the perpetual cash flow 0.6666667 0.7047619 0.745034 0.7876074 0.8326135
growth rate of NPV 0.0571429 0.0571429 0.0571429 0.0571429
Present Value of Growth Opportunity
cost of equity, EPS1, DPS1, ROE
stock price, PVGO
affiliation Hanyang University input cost of equity, expected growth rate, dividend per share at the end of the first year
email address leesb@hanyang.ac.kr output stock value
Descriptions
Links
data N/A
CAPM
Inputs
Cost of Equity 0.16
Expected Growth rate 0.1
DPS
1
2
Outputs
Stock Value 33.3333 = DPS
1
/(K
e
-g)
Interim Calculations
Growth rate Stock Value
0.00% $12.5000
1.00% $13.3333
2.00% $14.2857
3.00% $15.3846
4.00% $16.6667
5.00% $18.1818
6.00% $20.0000
7.00% $22.2222
8.00% $25.0000
9.00% $28.5714
10.00% $33.3333
Stock Value vs. Growth Rate
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
0% 1% 2% 3% 4% 5% 6% 7%
Growth Rate
Stock Value
cost of equity, expected growth rate, dividend per share at the end of the first year
7% 8% 9% 10%
Stock Value
affiliation Hanyang University input cost of equity, growth rate for the next 5 years, growth rate from year 6, dividend per share this year
email address leesb@hanyang.ac.kr output stock price
Descriptions
Links
data N/A
CAPM
Inputs
Cost of Equity 0.16
Growth rate for the next 5 years 0.1
Growth rate from year 6 0.06
DPS
0
5
Outputs
62.017655
62.017655
Interim calculation
1 2 3 4 5
DPS 5.5 6.05 6.655 7.3205 8.05255
Stock price
5
0 1 1
5
0 1 2
6
1 2
(1 ) 1
1
(1 ) 1
(1 ) (1 ) 1
1 1 (1 )
1 1
1 1
DPS g g
r r
DPS g g
g g r
r r
| |
+ + | |
|
|
|
+ +
\ .
+ +
\ .
+
+ + + | | | |

| |
+ +
\ . \ .
cost of equity, growth rate for the next 5 years, growth rate from year 6, dividend per share this year
6
8.535703
5
0 1 1
5
0 1 2
6
1 2
(1 ) 1
1
(1 ) 1
(1 ) (1 ) 1
1 1 (1 )
1 1
1 1
DPS g g
r r
DPS g g
g g r
r r
| |
+ + | |
|
|
|
+ +
\ .
+ +
\ .
+
+ + + | | | |

| |
+ +
\ . \ .
affiliation Hanyang University input cost of equity, EPS1, DPS1, ROE
Descriptions
Links
data N/A
CAPM
Inputs
Cost of Equity 0.2
EPS at year 1 8
DPS at year 1 6
ROE 0.3
Outputs
Stock price 48
Present Value of Growth Opportunity 8 = DPS
1
/(K
e
-g) - EPS
1
/K
e
Interim calculation
growth rate 0.075
cost of equity, EPS1, DPS1, ROE
stock price, PVGO
affiliation Hanyang University input cost of equity, EPS, DPS/EPS, ROE
Descriptions
Links
data N/A
CAPM
Inputs
year 1 year 2 year 3 from year 4
Dividend Payout Ratio (DPS/EPS) 0.4 0.5 0.6 0.8
ROE 0.5 0.4 0.3 0.2
EPS 8
Cost of Equity 0.1
Outputs
Stock price 153
Present Value of Growth Opportunity 73
Interim calculation
1 2 3 4 5
plowback ratio 0.6 0.5 0.4 0.2 0.2
growth rate 0.3 0.2 0.12 0.04 0.04
EPS 8 10.4 12.48 13.98 14.54
DPS 3.2 5.2 7.488 11.18 11.63
cost of equity, EPS, DPS/EPS, ROE
stock price, PVGO

13dividend Discount Model V3

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Dividend Discount Model copyright THC 2003. All rights reserved by Thomas Ho Company, New York, NY.

. USA www. thomasho.com tom.ho@thomasho.com

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