CFA Level 2 | Equity Valuation: Multi-Stage Dividend Discount Model (DDM)

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  • Опубліковано 15 січ 2020
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    CFA Level 2
    Topic: Equity Valuation
    Reading: Discounted Dividend Valuation
    In this video, we use the example of three stages of growth in dividends:
    Stage 1: 20% p.a. growth in dividends from Year 1 to Year 3
    Stage 2: 10% p.a. growth in dividends from Year 4 to Year 5
    Stage 3: 4% p.a. constant growth rate from Year 6 onwards
    Steps to Calculate Intrinsic Value:
    1. Calculate the dividends for Stage 1 and Stage 2.
    2. Calculate the terminal value at the end of Year 5 (end of Stage 2).
    3. Discount the dividends and terminal value to arrive at the intrinsic value.
    Find out more about the CFA Level 2 exam preparatory courses offered at Noesis (www.noesis.edu.sg/programme/cfa). We offer face-to-face tuition classes (lecture and revision/review) in Malaysia and the Blended Online (B/O) mode for candidates from Malaysia, Singapore, and Vietnam.

КОМЕНТАРІ • 19

  • @Darth.Caedus
    @Darth.Caedus 2 місяці тому

    I have been struggling with multistage DDM but this video has made it all the more easier. Thanks Fabian!

  • @kody8102010
    @kody8102010 3 роки тому +5

    Thanks, Fabian. In the CFP study program and I could NOT figure this out. Saved my night!

    • @FabianMoa
      @FabianMoa  3 роки тому

      You're welcome, Kody. Glad it helped!

  • @Furry_lil_goblin
    @Furry_lil_goblin 7 місяців тому +1

    Fantastic explanation. Thank you very much.

    • @FabianMoa
      @FabianMoa  7 місяців тому

      You are welcome!

  • @emmamanika3098
    @emmamanika3098 4 роки тому +2

    Thank you that was very helpful 😊

    • @FabianMoa
      @FabianMoa  4 роки тому

      You're welcome, Emma. More Level 2 videos in the playlist. Remember to click Subscribe for similar videos.👍

  • @allenlau4249
    @allenlau4249 2 роки тому

    Thank you fabian!

  • @sbautista8732WID
    @sbautista8732WID 2 роки тому

    Does anyone know why the cfa level 1 curriculum shows two different ways to solve? One is this way, which seems way more simple, the other is to calculate the dividends within the discounted formula, so 1.5(1.2)^3 x (1.1)/return, but then you have to multiply by 1/return at the end. It seems for the same problem.

    • @FabianMoa
      @FabianMoa  2 роки тому

      Hi Saul, referring to my example in the video, the terminal value at Year 5 = 1.5 * 1.2^3 * 1.1^2 * 1.04 /(0.12 - 0.04) = 40.7722.
      You can then discount the terminal value from Year 5 to Year 0 using 40.7722/(1 + 0.12)^5 = 23.1352
      Then you will have to calculate the present value of the dividends from Year 1 to Year 5
      PV of D1 = 1.8/1.12^1 = 1.6071
      PV of D2 = 2.16/1.12^2 = 1.7219
      PV of D3 = 2.592/1.12^3 = 1.8449
      PV of D4 = 2.8512/1.12^4 = 1.8120
      PV of D5 = 3.1363/1.12^5 = 1.7796
      So, total PV of dividends = 8.7655
      Value of equity = PV of dividends + PV of terminal value = 8.7655 + 23.1352 = 31.90
      -----
      The approach I took in the video is efficient (provided you are using the CF worksheet and NPV function).

  • @rosscoleman7778
    @rosscoleman7778 Рік тому

    For this 31.90 PV, are you not forgetting to add the current 1.50 or are we disregarding that since it was just paid?

    • @FabianMoa
      @FabianMoa  Рік тому

      Only future cash flows are to be discounted

    • @rosscoleman7778
      @rosscoleman7778 Рік тому

      @@FabianMoa right, but that isn't my question. the dividend already received doesn't need to be included in the total intrinsic value because it was already received and therefore not expected in the future. i worked it out. thank you.

  • @realebogabonnetswe924
    @realebogabonnetswe924 3 роки тому

    What if Ridgeco company pays 50% of its earnings as dividends?

    • @julanivishal
      @julanivishal 2 місяці тому

      Then just add the free cash in dividend discount model.

  • @thecrazyghost09
    @thecrazyghost09 4 роки тому

    Why is D5 added in the 5th yr? When it's a one stage growth model, we don't add the initial dividend [D0] to D1/(k-g) to find the value of stock at current time period. Similarly for the 5th time period, why don't we just take V5 instead of V5 + D5?

    • @FabianMoa
      @FabianMoa  4 роки тому +3

      We never add the D0 because it is a historical cashflow.
      The V5 represents the Present Value of the Dividends from Year 6 and onwards, so it does not include D5 in it, hence why we calculate V5 + D5.

    • @joat1901
      @joat1901 3 роки тому

      Thank you, Fabian. Can you please provide an example of when D0 would be included in a DDM calculation?

    • @FabianMoa
      @FabianMoa  3 роки тому

      If it's a preferred share, so D0 is a constant