Reading 40: Discounted Dividend Valuation-LOS n, (Part 1) 习

Just as we can determine the current value of the shares from the current dividends, growth forecasts and required return, we can solve for any one of them if we know the other three factors.

FCFF is another discounted cash flow model, not a method to determine required returns. Each of the other answers is a valid approach to determining an appropriate discount rate.

The discount rate = risk-free rate + beta (return expected on equity market less the risk-free rate). Here, discount rate = 0.06 + (0.8 × 0.04) = 0.092, or 9.2%.

Beta measures the correlation between the equity market or index for which the market risk premium is calculated and the particular asset being valued. Beta is used to approximate the proportion of the equity risk premium applicable to the asset (in relation to the market or index used).

Dividend discount models can be used to calculate required returns, assuming you have the stock price, dividends, and dividend-growth rates, so Hatchett is wrong. Strong is right about the fact that a DDM can calculate required returns, but wrong about the growth rate assumption. Multistage dividend discount models can account for expected changes in the growth rate.

To calculate an implied return using the two-stage DDM, we need the stock price, the dividend, a short-term growth rate, and a long-term growth rate. In the correct answer, we can derive the stock price from the P/E ratio and profits, then derive the dividend from the price and the yield. Given the P/E ratio, we can also distill growth rates using the PEG ratios. Admittedly, earnings-growth rates aren’t the same as dividend-growth rates, but analysts routinely use either in their models. More to the point, this is the only answer in which we can come up with even imperfect data for all the needed variables. One choice does not provide us with a way to find the dividend. The other option does not give us the needed short-term and long-term growth rates.

To calculate an implied return using the two-stage DDM, we need the stock price, the dividend, a short-term growth rate, and a long-term growth rate. In the correct answer, we can derive the stock price from the P/E ratio and profits, then derive the dividend from the price and the yield. Given the P/E ratio, we can also distill growth rates using the PEG ratios. Admittedly, earnings-growth rates aren’t the same as dividend-growth rates, but analysts routinely use either in their models. More to the point, this is the only answer in which we can come up with even imperfect data for all the needed variables. One choice does not provide us with a way to find the dividend. The other option does not give us the needed short-term and long-term growth rates.