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.
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I have been struggling with multistage DDM but this video has made it all the more easier. Thanks Fabian!
Thanks, Fabian. In the CFP study program and I could NOT figure this out. Saved my night!
You're welcome, Kody. Glad it helped!
Fantastic explanation. Thank you very much.
You are welcome!
Thank you that was very helpful 😊
You're welcome, Emma. More Level 2 videos in the playlist. Remember to click Subscribe for similar videos.👍
Thank you fabian!
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.
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
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The approach I took in the video is efficient (provided you are using the CF worksheet and NPV function).
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?
Only future cash flows are to be discounted
@@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.
What if Ridgeco company pays 50% of its earnings as dividends?
Then just add the free cash in dividend discount model.
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?
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.
Thank you, Fabian. Can you please provide an example of when D0 would be included in a DDM calculation?
If it's a preferred share, so D0 is a constant