Page 29 - FINAL CFA II SLIDES JUNE 2019 DAY 7

READING 29: DISCOUNTED DIVIDEND VALUATION
Valuation Using the H-Model
MODULE 29.3: MULTIPERIOD MODELS

What the shares would be worth if there
were no high-growth period and the
perpetual growth rate was g .
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An approximation of the additional value
that results from the high-growth period.

EXAMPLE: Calculating value with the H-model: Omega Foods currently pays a dividend of €2.00. The growth rate, which is currently 20%, is expected
to decline linearly over the next ten years to a stable rate of 5% thereafter. The required return is 12%. Calculate the current value of Omega.

H-model provides only an approximation of the value. To be precise, we’d
have to forecast each of the first ten dividends, applying a different growth rate
to each, and then discount them back to the present at 12%. In general, the H-
value is more accurate the shorter the high-growth period, t, and/or the smaller
the spread between the short-term and long-term growth rates, g – g .
S
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Valuation Using the Three-Stage DDM:
EXAMPLE: R&M has a current dividend of $1.00 and a required rate of return of 12%. A dividend growth rate of 15% is projected for the next two years, followed by a 10%
growth rate for the next four years before settling down to a constant 4% growth rate thereafter. Calculate the current value of R&M.

Fin Calc:,
• Noting that the total cash flow at Time 6 is $1.936 + $25.168 = $27.104:
• CF0 = 0; C01 = 1.150; C02 = 1.323; C03 = 1.455; C04 = 1.600; C05 = 1.760; C06 = 27.104; I = 12;
• CPT → NPV = 18.864.