Question #128 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

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Shared Context

- Using Shotput's financial statements and Jeff Cape's estimates, calculate an equity value for Shotput using the constant growth DDM: A) $60.0m. B) $61.2m. C) $66.7m.

Question

Calculate an equity value using the assumptions made by Karlson (to the nearest $m):

Answer Choices:

A. $73m

B. $79m

C. $87m

Explanation

This is three-stage growth with linear decline during the second stage. Step 1: Calculate the H model at T3: P3 = [D3 × (1 + gl)] / (r – gl) + [30 × H × (gh – gl)] / (r – gl) P3 = [$6m(1.07)3 × (1.02)] / (0.11 – 0.02) + [$6m(1.07)3 × 3 × (0.07 0.02)] / (0.11 – 0.02) P3 = $83.3m + $12.25m P3 = $95.55m Step 2: Discount H model value back to T0: $95.55m / 1.113 = $69.87m Step 3: Discount the dividends relating to the first stage: Dividend stream = 6(1.07) + 6(1.07)2 + 6(1.07)3 Dividend stream = 6.42 + 6.87 + 7.35 PV = 6.42 / 1.11 + 6.87 / 1.112 + 7.35 / 1.113 PV = 5.78 + 5.58 + 5.37 PV = $16.73m Adding Step 2 and Step 3 together: P0 = $69.87m + $16.73m P0 = $86.6m ($87m to the nearest $m)

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