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D
P
r
$1.00
$1.05
$1.10
$20.00
10.00%
$0.83
$15.03
$2.60
$15.03
$17.63
D equals
P equals
r equals
ASSUMPTIONS
Risk-free rate
Equity risk premium
Beta
Current dividend
Dividend growth rate
Current Stock Price
3.0%
6.0%
1.20
$2.00
5.0%
$24.00
1.72%
8.75%
5.00%
13.75%
$19.61
ferred Stock and deriving an implied growth rate and required return
ASSUMPTIONS
Stock price
Expected earnings
Required return on stock
$80.00
$5.00
10%
No-growth value
PVGO
percent of value due to PVGO
$50.00
$30.00
37.5%
OUTPUT - Calculating the component of the P/E ratio due to the PVGO
P/E firm
P/E PVGO
16.0
6.0
ASSUMPTIONS
Stock price
Trailing earnings per share
Current dividends per share
Dividend growth rate
Required return on stock
$50.00
$4.00
$1.60
5.0%
9.0%
0.40
10.0
10.5
12.5
Overvalued
ASSUMPTIONS - Calculating the PV of the dividend stream and the stock value using the G
D0
g1
r
g2
$2.00
15%
10%
4%
OUTPUT - Calculating the PV of the dividend stream and the stock value using the Gordon
t
1
2
3
3
D1
D2
D3
D4
P4
$2.30
$2.65
$3.04
$3.16
$52.72
PV(D1)
$2.09
Value of Stock
PV(D2)
$2.19
PV(D3)
$2.29
PV(P3)
$39.61
$46.17
ADDITIONAL ASSUMPTIONS - Calculating the PV of the dividend stream and the stock valu
Projected dividend payout ratio in year 4
60%
Projected trailing P/E ratio in year 4
13.0
OUTPUT - Calculating the PV of the dividend stream and the stock value using the P/E rati
Projected earnings in year 4
$5.27
Projected stock price in year 4
$68.54
Present value of projected year 4 stock price & dividend
$48.97
Value of Stock
$55.54
k value using the Gordon Growth Model for the terminal value
and the stock value using the P/E ratio for the terminal value
ASSUMPTIONS
Current dividend
gs
gL
H
Required return on stock
Current Stock Price
$3.00
20%
6%
5
10%
$120
OUTPUT - Calculating the required return implied by the current stock price
Total implied required return
10.40%
ock price
OUTPUT - Calculating the stock value using the 3-stage DDM, using the H-Model fo
PV0
Value
D1
$1.20
$1.09
D2
$1.44
$1.19
24.99
10.71
2.28
37.98
Overvalued
H-Model for the last 2 stages. Note: Assumes 1st Stage=2 years
ASSUMPTIONS
Net Profit Margin
Total Asset Turnover
Equity Multiplier
Retention Ratio
OUTPUT
Return on Assets
Return on Equity
Sustainable growth rate
5.00%
1.5
2.0
60%
7.50%
15.00%
9.00%
formula