Deriving the Dividend Discount Model in the Intermediate Microeconomics Class Stephen Norman Jonathan Schlaudraff Karianne White Douglas Wills* May 2012 Abstract This paper shows that the dividend discount model can be derived using the basic intertemporal consumption model that is introduced in a typical intermediate microeconomic course. This result will be of use to instructors who teach microeconomics to finance students in that it demonstrates the value of utility maximization in obtaining
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Evaluation Calculation Discursive 20% 80% Question 2 Dividend Valuation Model 45% 55% Question 3 Option strategies Straddles 80% 20% Question 4 Duration and convexity –Price – yield relationship 30% 70% Question 5 Option and Futures -mixed N/A 100% Question 6 CAPM 40% 60% Dividend Discount Models 1. The intrinsic value‚ denoted V0‚ of a share of stock is defined as the present value of all cash payments to the investor in the stock‚ including dividends as well as the proceeds from the ultimate sale
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Dividend discount model Dividend discount model (DDM) is a way of valuing a share based on the net present value of the dividends that you expect to receive in the future. According to the DDM‚ dividends are the cash flows that are returned to the shareholder. FY 2002 2003 2004 2005 2006 2007F 2008F 2009F Share price 0.155 0.150 0.230 0.370 0.450 0.450 Dividends per share 0.005 0.012 0.014 0.012 0.013 0.019 0.0178 0.020 Dividend Growth 0.0833 0.258 0.014 0.014 Dividend rates
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The discount rate Main article: Discount rate The rate used to discount future cash flows to their present values is a key variable of this process. A firm’s weighted average cost of capital (after tax) is often used‚ but many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term
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ch10 Student: ___________________________________________________________________________ 1. The capital gains yield plus the dividend yield on a security is called the: A. geometric return. B. average period return. C. current yield. D. total return. 2. The expected return on a security in the market context is: A. a negative function of execs security risk. B. a positive function of the beta. C. a negative function of the beta. D. a positive function of the excess security
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1 Factor Models The Markowitz mean-variance framework requires having access to many parameters: If there are n risky assets‚ with rates of return ri ‚ i = 1‚ 2‚ . . . ‚ n‚ then we must know 2 all the n means (ri )‚ n variances (σi ) and n(n − 1)/2 covariances (σij ) for a total of 2n + n(n − 1)/2 parameters. If for example n = 100 we would need 4750 parameters‚ and if n = 1000 we would need 501‚ 500 parameters! At best we could try to estimate these‚ but how? In fact‚ it is easy to see
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$42 per share. Assume the expected rate of return on Federated’s stock is 18 percent. • Taxes: Federated’s marginal tax rate is Tc = .35 What are the key assumptions underlying your calculation? For what type of project would Federated’s weighted-average cost of capital be the right discount rate? 2. Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 15 percent (D/V =.15 ). The interest rate has dropped to 8.6 percent. Recalculate
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RISK-ADJUSTED DISCOUNT RATES and LIABILITY BETA RUSSELL E. BINGHAM T H E H A R T F O R D FINANCIAL SERVICES G R O U P Table of Contents Page 2 3 5 7 8 11 12 13 14 14 15 16 17 17 18 Subject Abstract 1. Summary 2. Total Return Model 3. After-Tax Discounting 4. Derivation of Risk-Adjusted Discount Rate and Liability Beta Figure l : Baseline Risk / Return Line vs Leverage 5. Liability Beta Figure 2: Equity vs Liability Beta Figure 3: Equity Beta vs Risk-Adjusted Discount Rate (After-Tax)
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Equity Valuation Lecture Map Definitions of Value Book value‚ Liquidation value‚ Intrinsic value‚ Market value Dividend discount models Constant-growth Multi-stage growth Value Metrics and Determinants of Value Current earnings and growth P/E Lesmond 1 Book Value of Equity The firm’s equity value‚ or stock value‚ is stated right on the firm’s books This is NOT the market value of equity Book value per share of Equity is the value of common equity on the books‚ divided
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contribute to a low or high growth rates in a country? There are three categories of factors that contribute to a low or high growth rates. These categories are the demand factor‚ the efficiency factor‚ and supply factors. Government spending or exports can lead to a higher to aggregate demand and higher economic growth. “Economic growth requires increases in total spending to realize the output gain made available by increased production capacity” (McConnell‚ 2012‚ p. 513). One way to accomplish this
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