Flashcards in Chapter 7: equity valuation part 3 formulas for common shares Deck (15)

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1

## determine share price for a common share using DDM if selling after one year

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P0 = D1 / (Kc - g)

or in otherwords

dividend _ selling price / (1 + required rate) = share price

2

## using the constant growth DDM how do you determine the selling price

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selling price = current dividends (1 + growth ate) / RRR- growth rate

Kc must be greater than g

the expected growth rate must be expected to be the same indefinitely

3

## estimate the required rate of return using DDM

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Kc = D1 / Po + g

Kc = RRR

D1 = estimate dividend at end of year 1

Po= market rate

4

## What is the expected dividend rate on a share calculation

### D1 / Po

5

## what does g represent

### expected capital gains yield or growth rate

6

## How do you estimate the value of growth opportunities

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PVGO = selling price - expected EPS / RRR

PVGO = pv of growth opportunities

7

## estimate common growth ddms

### add more from my page 4

8

## how do you find the sustainable growth rate

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g = b x ROE

b = firms retention ratio

= 1 - firms dividend payout ratio

9

## How do you calculate the retention ratio and dividned payout ratio

### add

10

## how do you estimate a firms sustainable growth using the DuPont system

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g = b x ROE

ROE - net profit margin x turnover ratio x leverage ratio

payout ratio - DP / EPS

b = - firms div payout ratio

11

## What is the multiple stage growth DDM calculator method

### add

12

## how do you calculate price using DDM

### dividends expected in 1 year / (required rate - growth)

13

## How do you calculate growth using DDM

### g = (dividend expected / current dividend) - 1

14

## how do you calculate current dividend using ddm

### dividend expected / (growth rate + 1)

15