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Lecture # 8 FM

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Usman Dasti
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4 views

Lecture # 8 FM

Uploaded by

Usman Dasti
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 14

Valuation of Long Term Securities 1

Non-Constant Growth Model/


2
Multi-Period Valuation Model

Important Symbols
D0 = Current Dividend/Actual Dividend Received/ Recently Received
Dividend/ Present Dividend/ Currently pays dividend
D1 = Dividend expected after 1 year or dividend expected a year hence
D2 = Dividend expected after 2 year or dividend expected 2 year hence
D3 = Dividend expected after 3 year or dividend expected 3 year hence
D4 = Dividend expected after 4 year or dividend expected 4 year hence
D∞ = Dividend expected forever or perpetuity
The stock of national corporation pays a $1.45 dividend which is
expected to grow at 15% for four years, then at a constant 6%
into the future, the discount rate is 11%. Calculate the value of
the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
Step # 1 4

Calculation of the Expected Dividend Amount


of D1, D2, D3 and D4 and Their Present Values

Do = Current Amount of Dividend or Dividend at the beginning of year 1


D1 = Expected Dividend Amount at the end of Year 1
D2 = Expected Dividend Amount at the end of Year 2
D3 = Expected Dividend Amount at the end of Year 3
D4 = Expected Dividend Amount at the end of Year 4
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
Present Value of D1
D1 = DO (1+ g)n PV = FV/(1+ Ks)n
D1 = 1.45 (1+ 0.15)1 PV = 1.66/(1+ 0.11)1
D1 = 1.45 (1.15)1 PV = 1.66/(1.11)1
D1 = 1.66 PV = 1.49
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
D2 = DO (1+ g)n Present Value of D2
D2 = 1.45 (1+ 0.15)2 PV = FV/(1+ Ks)n
D2 = 1.45 (1.15)2 PV = 1.91/(1+ 0.11)2
D2 = 1.45 (1.3225) PV = 1.91/(1.11)2
D2 = 1.91 PV = 1.91/1.2321
PV = 1.91/1.2321
PV = 1.55
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
D3 = DO (1+ g)n Present Value of D3
D3 = 1.45 (1+ 0.15)3 PV = FV/(1+ Ks)n
D3 = 1.45 (1.15)3 PV = 2.20/(1+ 0.11)3
D3 = 1.45 (1.5208) PV = 2.20/(1.11)3
D3 = 2.20 PV = 2.20/1.3676
PV = 1.6086
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
D4 = DO (1+ g)n Present Value of D4
D4 = 1.45 (1+ 0.15)4 PV = FV/(1+ Ks)n
D4 = 1.45 (1.15)4 PV = 2.53/(1+ 0.11)4
D4 = 1.45 (1.7490) PV = 2.53/(1.11)4
D4 = 2.53 PV = 2.53/1.5180
PV = 1.67
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock

DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
The Sum of All Present Values From D1 to D4
Sum of PV from D1 to D4 = 1.49 + 1.55 + 1.60 + 1.67 = 6.31
Sum of PV from D1 to D4 = 6.31
Step # 2 10

Calculation of the Expected Dividend Amount “P”


at the beginning of “constant growth period”. After
such calculation, calculate the Present value
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock
DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11
P4 = [D4(1 + g)]/[(Ks - g)] Present Value of P4
P4 = [2.53(1 + 0.06)]/[(0.11 – 0.06)] PV = FV/(1+ Ks)n
P4 = [2.53(1.06)]/(0.05) PV = 53.63/(1+ 0.11)4
P4 = 2.6818/(0.05) PV = 53.63/(1.11)4
P4 = 53.63 PV = 53.63/1.5180
PV = 35.33
Note: P4 means price or value of Dividend at the end of year 4. Or value at the
beginning of constant growth period which starts after year 4
Step # 3 12

Take sum of all calculated present values. The sum


will be the Intrinsic Value of the Stock
Net Present Value or Sum of All Present Values = 6.31+ 35.33 = 41.64
Net Present Value or Sum of All Present Values or Intrinsic Value = 41.64
The stock of national corporation pays a $1.45 dividend which is expected
to grow at 15% for four years, then at a constant 6% into the future, the
discount rate is 11%. Calculate the value of the stock
DO = $1.45
Phase 1 Growth Rate (D1 to D4 ) = g =15 percent or 0.15
Perpetuity Phase (After D4 which is D∞) = g = 6 percent or 0.06
Ks = 11 percent or 0.11

Net Present Value or Sum of All Present Values = 6.31+ 35.33 = 41.64
Net Present Value or Sum of All Present Values or Intrinsic Value = 41.64

Interpretation: The intrinsic value of the stock of national corporation


which pays a $1.45 dividend and expected to grow at 15% for four years,
then at a constant 6% into the future is $41.64. It will happens if the
discount rate is 11%

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