Dividend Discount Model

Three-Stage Example

Discount rate (r):

7.01%

Growth period (g1):

Growth year

5

Initial growth period of EPS

10.40%

Maturity period (g2):

Payout at maturity

45%

Retention rate at maturity (retent)

55%

Growth rate at maturity: r x retent

3.856%

Transition period:

Transition years

12

Growth rate of EPS (incremental)

0.50%

Other information:

Current fiscal year EPS

3.72

Current calendar year dividend

1.09

Current payout (p1)

29.30%

Growth year payout = current

29.30%

Maturity payout (p2)

45.00%

Transition years payout (incremental)

1.21%

Growth + Transition Years

17

Terminal value (TV) = div1/(r-g)

Year

Assumption

EPS

growth

Dividend

payout

TV

PV (div+TV)

1

Growth year EPS

4.11

10.40%

1

1.20

29.30%

1.12

2

Growth year EPS

4.53

10.40%

2

1.33

29.30%

1.16

3

Growth year EPS

5.01

10.40%

3

1.47

29.30%

1.20

4

Growth year EPS

5.53

10.40%

4

1.62

29.30%

1.23

5

Growth year EPS

6.10

10.40%

5

1.79

29.30%

1.27

6

Transition year EPS

6.70

9.90%

6

2.05

30.51%

1.36

7

Transition year EPS

7.33

9.39%

7

2.33

31.72%

1.45

8

Transition year EPS

7.99

8.89%

8

2.63

32.92%

1.53

9

Transition year EPS

8.66

8.39%

9

2.95

34.13%

1.61

10

Transition year EPS

9.34

7.88%

10

3.30

35.34%

1.68

11

Transition year EPS

10.03

7.38%

11

3.66

36.55%

1.74

12

Transition year EPS

10.72

6.88%

12

4.05

37.75%

1.79

13

Transition year EPS

11.40

6.37%

13

4.44

38.96%

1.84

14

Transition year EPS

12.07

5.87%

14

4.85

40.17%

1.88

15

Transition year EPS

12.72

5.37%

15

5.26

41.38%

1.90

16

Transition year EPS

13.34

4.86%

16

5.68

42.58%

1.92

17

Transition year EPS

13.92

4.36%

17

6.09

43.79%

206.176

67.09

18

Maturity

14.45

3.86%

18

6.50

45.00%

Theoretical price

91.78

Note: EPS = earnings per share

Calculate the Sensitivity analysis

Sensitivity analysis Discount Rate 12.00% 91781 5.60% 6.10%, 6.60%) 7.10%) 7.60% 11.00% 11.500% 12.500% 13.000% Growth rate at maturity Sensitivity analysis Discount Rate 12.00% 91781 5.60% 6.10%, 6.60%) 7.10%) 7.60% 11.00% 11.500% 12.500% 13.000% Growth rate at maturity