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  1. #1
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    Default Dividend Valuation Models

    I have the following questions and the answers. Can anyone show me how they got the answers.

    Question
    9. Company B paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, what is the value of the stock?
    Answer
    d. $17.67

    Question
    10. A stock is not expected to pay dividends until three years from now. The dividend is then expected to be $2.00 per share, the dividend payout ratio is expected to be 40%, and the return on equity is expected to be 15%. If the required rate of return is 12%, the value of the stock today is closest to;
    Answer
    c.$53

  2. #2
    Legend peat's Avatar
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    I will have a look at this for you Aaron when I get some free time over the next few days so before I chastise you for asking others for help I will see whether I can make sense of it myself. But this was the sort of thing I was working on last year.... so hopefully I can do it.
    For clarity, nothing I say is advice....

  3. #3
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    Quote Originally Posted by belgarion View Post
    Aaron, where did the questions come from?
    Fundamentals of Investing by Gitman, Joehnk, Juchau...2nd edition. They are CFA exam questions on page 326. The other questions are easy and the answer to these two questions will be in the previous chapter. I just need to spend a bit more time to find the step(s) I keep missing. I just thought someone might easily show me where I'm going wrong. I wouldn't spend too much time on it. I will post my workings if I get it right.
    Last edited by Aaron; 05-12-2011 at 11:02 AM.

  4. #4
    Senior Member Lego_Man's Avatar
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    Under the Gordon Growth Model, the value at T-Zero equals:

    D/(k-g)

    Where:

    D is the dividend at the end of the first period
    k is the required Rate of Return
    g is the expected growth rate

    g is calculated by multiplying the Retention Rate (ie 1- Dividend Payout Ratio) and ROE.

  5. #5
    Senior Member Lego_Man's Avatar
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    So in Question 1:

    g = 0.6 x 0.1
    = 0.06

    D = 1 x 1.06 = 1.06 (the dividend of 1 dollar just paid will be 1.06 next year)

    k = 0.12

    P = 1.06/(0.12-0.06)
    = $17.67

  6. #6
    Senior Member Lego_Man's Avatar
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    The second one is a little bit more tricky:

    g = 0.6 x 0.15 = 0.09

    D = 2

    k = 0.12

    Dividends start at T+3. Therefore you can apply the same model as at T+2 as above and discount the result back to its present value:

    P2 = 2/(0.12-0.09) = 66.67

    To discount that value back to T-0, simply divide by (1+required ROR)^T ie 1.12^2, giving you $53.14.

  7. #7
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    Thanks Lego Man. I had trouble with the growth rate. I guess it makes sense that what is not paid out as dividends will grow depending on the Return on Equity. Seems simple now, thanks.

  8. #8
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    Just looking at dividend history for Contact Energy on the NZX but the NZX site only has two years unless you want to pay $4,695 per annum.

    Dividendyield.co.nz (thanks Birmanboy)and Contacts website both have the cash dividend paid but not the imputation credits attached. Same with the IRG yearbook.

    Is there anywhere I can find the gross dividend including imputation credits attached as Contact does not always attach them at 28%.

    Would there be a section in the company annual report that would cover this without me having to read all 90 odd pages to find the info?

    I want the gross dividend information as using the cash paid would be like getting an interest rate based on net interest paid without know at what rate tax was deducted. Or have I got that wrong?

    I do have the history of cash payments so maybe someone has an idea how I could use that, such as assuming fully imputed dividends (but risk over estimating).

  9. #9
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    I will take it that the lack of replies means there is no historical data easily available that anyone knows about.

  10. #10
    Legend peat's Avatar
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    Quote Originally Posted by Aaron View Post
    I will take it that the lack of replies means there is no historical data easily available that anyone knows about.
    I couldn't see any available in the eg 2013 annual or interim reports.
    For clarity, nothing I say is advice....

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