Year

1
2
3
4
5

Expected Dividend
3.00
3.24
3.50
3.00
3.60

Year
5

Expected Price
when sold
92.90

Expected rate of return for stocks of similar risks :

10%

Expected Price of the stock (Intrinsic Value) :

70.00

Constant Dividend Model

A company which is expected to pay a constant dividend has a cash flow behaviour identical to perpetuity
For example, if we assume the following :
Face Value
Maturity
Current (constant) Dividend

100

10

(years)

Market Yield for a bond of the same risk and maturity:

(or market value)

8%

Rs. 125.00 (cash flows are in perpetuity)

One could get the same result on discounting cash flows after projecting them for a 'long' period - say 255 years, but that clearly
The Present Value is the price that a 'rational' investor can expect to 'buy' or 'sell' the share for.

255 years, but that clearly is not needed!

Growth Model
P0

D0 (1 g ) D0 (1 g ) 2
D0 (1 g )

..........
....

(1 r )
(1 r ) 2
(1 r )

P0

D1
(r g )

Face Value
Maturity
Current Dividend
Expected Growth Rate

Future Cash Flow

100

10
5%
1
10.50

(years)

2
11.03

Market Yield for a bond of the same risk and maturity:

Present Value
(or market value)

Year
3
11.58

4
12.16

5
12.76

6
13.40

8%

Rs. 350.00

The Present Value is the price that a 'rational' investor can expect to 'buy' or 'sell' the share for.

If you want to sell after, say, 5 years then

Year
1
2
3
4
5

Dividend Share Sale

10.50
11.03
11.58
12.16
12.76
446.70

Total
10.50
11.03
11.58
12.16
459.46
350.00

7
14.07

8
14.77

----------

Years
Asset Value
Earnings
Investment

1
10.00
1.20
1.20

2
11.20
1.44
1.44

3
12.64
1.73
1.73

4
14.37
2.07
2.07

5
16.44
2.49
2.00

6
18.44
2.81
2.00

7
20.44
3.18
1.59

Free Cash Flow

EPS Growth (%)

0.00
20%

0.00
20%

0.00
20%

0.00
20%

0.49
13%

0.81
13%

1.59
6%

Plowback %
ROI
EPS Growth Rate
Expected Return

100%
20%
20%
10%

100%
20%
20%

100%
20%
20%

100%
20%
20%

Present Value for FCF - Year 1 - 6)

Present Value for FCF beyond Year 6
(at the end of year 6)
Present Value for FCF beyond Year 6
(at the end of year 0)
PV Business

$0.8
$39.6

1.44

1.73

2.07

Last Period Earnings + ROI * Incr. Inv =

This Period's Earnings

80%
16%
13%

71%
18%
13%

50%
12%
6%

$22.4
$23.1

2.49

2.81

3.18

8
22.03
3.37
1.69

9
23.72
3.57
1.79

10
25.50
3.78
1.89

1.68
6%

1.78
6%

1.89
6%

50%
12%
6%

3.37

50%
12%
6%

3.57

50%
12%
6%

3.78

4.01