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Valuation using the dividend valuation model - Coggle Diagram
Valuation using the dividend valuation model
DVM is based on the principle that the current value of an equity share is the discounted value of all expected dividend payments that the share is expected to yield in future years
The NPV is calculated using an appropriate risk adjusted rate that discounts the value of future cash flows to todays date
Future cash flows would include dividends and the selling price of the share when sold, for shares that do not pay dividends, the future cash flows would be equal to the intrinsic value of the selling price of the share
Current intrinsic value of an equity share = sum of present value of all future cash flows
Sum of present value of all future cash flows = sum of present value of future dividends + present value of the share price
Assumptions
The future income stream is the dividends paid out by the company
Dividends will be paid in perpetuity
Dividends will be constant or growing at a fixed rate
Variable growth model
Dividends paid by companies do not remain constant over a number of years
The variable growth model divides the dividend growth into 3 phases
An initial phase of fast growth
A slower transition phase
A sustainable long run lower growth rate
Growth rate (g) = r x b
Where
R = annual rate of return from investing
B = the proportion of annual earnings retained