Discounted Dividend Model

[samdaman]

Hey guys

Just having a little problem with my DDM spreadsheet I've made.

It seems to be valuing stocks really high, for example I've got some stocks on 2% growth rates returning 20%+. Just wondering if you guys can see a problem with it

It spans out 10 years.
dividends are proportional to growth
and discounted at a rate of (1+r)^t, r being expected return and t being time in years.
the 10th year is the terminal year so I changed it to the price formula = Dn/r+g, D = dividend that year, r as above and g is terminal growth.
Sum up all the discounted dividends and terminal price from 10th year onwards to get current value. I've been solving for r numerically btw to find expected returns at current stock prices.

If you can see anything really wrong tell me because from the research I've done the math checks out.

Cheers guys
Sam

[Okebw]

Would it not be R-G?

[belted galloway]

Dn/r+g,
Sam

Should be required rate of return less anticipated future constant growth rate, ie r-g.

Also, are you discounting the perpetuity to time 0?

[samdaman]

I had it as r-g just typed it wrong up there, and I just came to take the thread down because I realised I hadn't discounted it :)

Cheers for that its all solved and my valuations make much more sense now! Next problem, how do I take down this thread :s

[Okebw]

(Div0 X(1+G)/R-G X (1-((1+G)/(1+R))^N for the dividend portion and
terminal value/(1+R)^n for the terminal value if memory serves.

I've got an exam on this Thursday so I'll double check the formula sheet shortly.

Where N=number of years
R= Required return
G= growth rate