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ABF305 Investment Management
Lecture 4
ABF305投资管理
讲座4
Company stocks (equities) are a key investment choice.
公司股票（股票）是一个重要的投资选择。
As such, we will be looking at how to value them using:
因此，我们将期待在如何珍惜他们使用的：
Dividend discount model.
股利贴现模型。
Free cash flow model.
自由现金流模型。
Valuation is an intrinsic value
估值是内在价值
The intrinsic value refers to a formula value, that is to say a theoretical value which may or may not be the same as the market value.
本征值是指一个公式的值，也就是说一个理论值，这可能是也可能不是相同的市场价值。
Dividend discount model.
股利贴现模型。
For the dividend discount model, the intrinsic value 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 of the stock.
股息贴现模型，内在价值被定义为所有的现金支付给投资者的股票，包括股息，以及出售股票所得款项的最终的现值。
Regarding the cash flows:
关于现金流量：
A fundamental concept for the dividend discount model is the viewpoint that the company is a going concern, that is to say, the company is as an entity which will continue to exist indefinitely and will have as such a perpetual life.
If we were to represent this as a formula:
If V stands for the intrinsic value, and D stand for the dividend, and P the final price for the shares on sale
The cash flow needs to be in present value terms, so:
Where k is the expected rate of return.
Textbook definition.
The dividend discount model is a formula stating that the intrinsic value of a firm is the present value of all expected dividends. (Bodie, Kane and Marcus, ‘Investments’ 8th Edition).
Another textbook definition.
Another definition is the dividend discount model is a technique for estimating the value of a stock issue as the present value of all future dividends. (Reilly and Brown, ‘Investment Analysis and Portfolio Management’ 8th Edition).
What does k represent:
K represents an expected return which is determined by the Capital Asset Pricing Model or CAPM for short.
What it represents in essence is the return that you would expect given the related risk of the stock.
The CAPM is denoted by:
Where:
E(ri) = the expected rate of return.
= the risk free return (usually Treasury bonds)
= the expected (E) rate of return on the market portfolio
= is the coefficient for the security relative to the market portfolio
For the dividend discount model, the expected rate of return is given by the letter k which is E(ri).
The Dividend Discount Model is adjusted for growth (g).
So the formula becomes:
The formula can be simplified to:
This is the Constant-Growth Dividend Discount Model (or the Gordon Model).
With respect to the constant-growth model, the intrinsic value will increase if:
The firm chooses a lower dividend payout ratio from 100% and the funds which are ploughed back, the return on equity is greater than k, the expected rate of return.
For g where a plowback has occurred:
g is = ROE (return on equity) x b where b is the plowback ratio.
A problem with the constant growth model is the assumption that growth is constant. In reality this is not the case. Firms will have different growth rates.
The dividend discount model can be adjusted for this though through a multistage growth model.
A Two-Stage Growth Model.
Example: Let us say that we have a firm which has a number of high growth years which occur for 2008, 2009, 2010 and 2011. Thereafter, the firm’s’ growth enters a constant –growth phase. To determine the value for this firm:
You determine the value for each specific high growth year and then calculate the value for the constant growth phase thereafter.
In terms of a numerical formula it would be:
The price for 2011 would be where you use the constant-growth dividend discount model, so:
If a firm has the following dividends for 2008, 2009, 2010, and 2011 of 0.77 cents, 0.88 cents, 0.99 cents and $1.10 and k is = 11.7% and for the constant growth phase it is 9.25% which is equal to dividend retention of 74% and a ROE of 12.5%.
A Multi-Stage Model:
Let us say for our example that there was a period of declining growth from 2012 to 2014 and from 2015 there is a period if constant growth: so you use the dividend for 2014 plus price 2014 to calculate the price at the end.
Let us say for our example, the dividend for 2012 is 1.05, for 2013 it is 1.00, and for 2014 it is 0.95 cents.
In regards to any valuation model, you need to be aware that the estimates you use will affect the value of the stock. For example, with the constant-growth dividend discount model: the value for the stock will be affected by the estimate of dividend, growth rate and expected rate of return used whereby:
A stock’s value will be greater the larger it’s expected dividend per share;
A stocks’ value will be greater the lower the market capitalisation rate, k;
A stock’s value will be greater the higher the expected growth rate of dividends.
One of the reason’s why you need to be aware of what affects the value is that your estimate of the stock price is no better than the assumptions you use.
We will look further into this in next week’s lecture.
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