1 DIVIDEND DISCOUNT MODEL: THREE-STAGE EXAMPLE 2 3 4 Discount rate (r): 5 Growth period (g1): 6 Growth years 7 Initial growth rate of EPS 8 9 10 11 12 13 Maturity period (g2): Payout at maturity Retention rate at maturity (retent) Growth rate at maturity: r x retent Transition period: Transition years 14 Growth rate of EPS (incremental) 15 Other information: 16 Current fiscal year EPS 17 Current calendar year dividend 18 Current payout (p1) 19 Growth years payout = current 20 Maturity payout (p2) 2222 21 Transition years payout (incremental) Growth + Transition Years 23 Terminal value (TV) = div1/(r-g) 24 5.00% 71 5.00% 40% 60% 3.00% 10 0.18% 5.00 0.50 10.00% 10.00% 40.00% 2.73% 17 24 25 Year Assumption EPS growth Dividend payout TVPV (div+TV) 26 1 Growth year EPS 5.25 5.00% 1 0.53 10.00% 0.50 27 2 Growth year EPS 5.51 5.00% 2 0.55 10.00% 0.50 28 3 Growth year EPS 5.79 5.00% 3 0.58 10.00% 0.50 29 4 Growth year EPS 6.08 5.00% 4 0.61 10.00% 0.50 30 5 Growth year EPS 6.38 5.00% 5 0.64 10.00% 0.50 31 6 Growth year EPS 6.70 5.00% 6 0.67 10.00% 0.50 32 7 Growth year EPS 7.04 5.00% 7 0.70 10.00% 0.50 33 8 Transition year EPS 7.39 4.82% 8 0.94 12.73% 0.64 34 9 Transition year EPS 7.76 4.64% 9 1.20 15.45% 0.77 35 10 Transition year EPS 8.10 4.45% 10 1.47 18.18% 0.90 36 11 Transition year EPS 8.45 4.27% 11 1.77 20.91% 1.03 37 12 Transition year EPS 8.79 4.09% 12 2.08 23.64% 1.16 38 13 Transition year EPS 9.14 3.91% 13 2.41 26.36% 1.28 39 14 Transition year EPS 9.48 3.73% 14 2.76 29.09% 1.39 40 15 Transition year EPS 9.81 3.55% 15 3.12 31.82% 1.50 41 16 Transition year EPS 10.14 3.36% 16 3.50 34.55% 1.61 42 17 Transition year EPS 10.47 3.18% 17 3.90 37.27% 215.6 95.78 43 18 Maturity 10.78 3.00% 18 4.31 40.00% 44 45 44 Theoretical price 109.56 1-) As of February 2010, what is your assessment of the worth of Wal-Mart's stock? Utilize all the methods discussed in the case to value the shares, including the following: a. The perpetual growth in dividends b. Forecasted dividends for the next several years plus sale of the stock in the future c. The three-stage dividend model d. The price/earnings approach Clearly State any assumptions