Method 1: The Dividend Discount Model estimation, You need to perform the followings: If you chose a mature stock: use the Constant Dividend Growth Model (g < k) of chapter 6, (Equation 6-3), find current dividends per share, D(0), from the income statement. Estimate the dividend growth rate, g. You can estimate g in two to three different ways, like historical method, analysts estimate, or g = historical ROE* retention rate; then take an average these methods for your final g. Next, estimate the discount rate, k, using the CAPM and D1/P0 +g, and bond yield + premium; then take the average of these three for your final K. Once you have D1, g, and K estimated, then estimate the stock value. Then perform a sensitivity/scenario analysis, see the Valuation of ABC Mature stock file.

For the Microsoft Corp. Inc (MSFT).