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Dividend Discount ModelAssumptions 1. The firm is expected to grow at a higher growth rate in the first period.

2. The growth rate will drop at the end of the first period to the stable growth rate.

3. The dividend payout ratio is consistent with the expected growth rate.

Inputs needed 1. Length of high growth period

2. Expected growth rate in earnings during the high growth period.3. Dividend payout ratio during the high growth period.

4. Expected growth rate in earnings during the stable growth period.

5. Expected payout ratio during the stable growth period.

6. Current Earnings per share

7. Inputs for the Cost of Equity

How the model wor The expected dividends are estimated for the high growth period, using the payout

ratio for the high growth period and the expected growth rate in earnings per share.

The expected growth rate is estimated either using fundamentals:

Expected growth = Retention Ratio * Return on Equity

Alternatively, you can input the expected growth rate.

At the end of the high growth phase, the expected terminal price is estimated usingdividends per share one year after the high growth period, using the growth rate

in stable growth, the payout ratio in stable growth and the cost of equity in stable

growth.

The dividends per share and the terminal price are discounted back to the present at

the cost of equity changes.

If your cost of equity in stable growth is different from your cost of equity in high

growth, the cost of equity in the second half of the stable growth period will be

adjusted gradually from the high growth cost of equity to a stable growth cost of

equity.

Options Available You can make this model into a three stage model by answering yes to the question

of whether you want me to adjust the inputs in the second half of the high growth

period. If you do, I will adjust the growth rate, the payout ratio and the cost of

equity from high-growth levels to stable growth levels gradually.

You can also make this a stable growth model by setting the high

growth period to zero.

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Inputs from current financialsNet Income = $72.36 Last year (in currency)

Interest income from cash and marketable securities = $0.00

Book Value of Equity = $2,602.00 $2,588.00 (in currency)

Cash and Marketable Securities $0.00 $0.00

Market Value of Equity = $7,303.00

Number of shares outstanding = 653.15

Current Capital Expenditures = $335.00

Current Depreciation = $204.00

Change in non-cash Working capital in most recent year = ($1.20)

Net Debt Issued (Paid) during the year = $644.10

Do you want to normalize the net income/earnings per share No

Do you want to normalize your reinvestment needs? Yes

If yes, these will be your normalized values

Normalized Net Capital Expenditures = $131.00

Normalized Working Capital Change = $52.33

Normalized Net Debt issued = $74.82

Inputs for Discount Rate

Beta of the stock = 0.75

Riskfree rate= 10.00% (in percent)

Risk Premium= 6.28% (in percent)

Inputs for High Growth Period

Length of high growth period 10

Do you want to calculate the growth rate from fundamentals No (Yes or No)

If no, enter the expected growth rate in earnings in high gro 44.91%

& the equity reinvestment rate during the high growth perio 150%

If yes, the following will be the inputs to the fundamental growth formulation:

Non-cash ROE = 2.80% (in percent)

Equity Reinvestment Rate = 149.97% (in percent)

Do you want to change any of these inputs for the high gro No

If yes, specify the values for these inputs (Please enter all variables)

Non-cash ROE = 27.83% (in percent)

Equity Reinvestment Rate = 149.97% (in percent)

Do you want to change any of these inputs for the stable gro Yes

If yes, specify the values for these inputs

ROE = 20.00% (in percent)

Do you want me to gradually adjust your inputs during the s Yes

Inputs for Stable Growth Period

Enter growth rate in stable growth period? 10.00% (in percent)

Stable equity reinvestment ratio from fundamentals is = 50.00% (in percent)

Do you want to change this equity reinvestment rate? No (Yes or No)

If yes, enter the stable period equity reinvestment rate = (in percent)

Will the beta to change in the stable period? Yes (Yes or No)

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If yes, enter the beta for stable period = 0.80

Enter the risk premium to use in stable period = 4.95%

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Choose the approach to normalized earnings 1

Approach 1: Average Net Income over last 5 years

-5 -4 -3 -2

Net Income $1,662.00 $2,533.00 $1,876.00 $1,933.00

Approach 2: Normalized return on equityNormalized ROE = 22%

Normalized Earnings Calcula

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Current Average

$2,122.00 $2,025.20

ion

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Normalizing Net Cap Ex

Choose the approach to normalized 0

Approach 1: Average Net Cap Ex over last 5 years

-5 -4 -3 -2 Current

Net Cap Ex $1,391.00 $1,485.00 $1,996.00 $2,332.00 $219.00

EBIT $4,833.00 $5,001.00 $4,967.00 $3,982.00 $5,134.00

Approach 2: Industry average

Industry average net cap ex/ EBIT 22%

Normalizing Non-cash Working Capital

Choose the approach to normalized 1

Approach 1: Average Net Income over last 5 years

Total non-cash working capital curr 180

Revenues in current year = 2253

Revenues last year = 1598

Approach 2: Industry average

Industry average non-cash WC/ Re 22%

Normalizing Net Debt Issued

Choose the approach to normalized 1

Approaches 1 or 2: Current Book or Market Debt Ratio

Book value of debt in current year 1794

Approach 2: Industry average

Industry average debt to capital rati 15%

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Average

$1,484.60

$4,783.40

31.04%

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Year xpected Grow Net Income Reinvestmen FCFE Cost of Equity resent Value1 44.91% $104.85 149.97% ($52.40) 14.71% ($45.68)2 44.91% $151.93 149.97% ($75.92) 14.71% ($57.70)

3 44.91% $220.16 149.97% ($110.02) 14.71% ($72.89)4 44.91% $319.03 149.97% ($159.43) 14.71% ($92.08)5 44.91% $462.29 149.97% ($231.02) 14.71% ($116.32)

6 37.93% $637.61 129.98% ($191.14) 14.56% ($84.01)7 30.94% $834.92 109.98% ($83.35) 14.41% ($32.02)8 23.96% $1,034.98 89.99% $103.61 14.26% $34.839 16.98% $1,210.74 69.99% $363.29 14.11% $107.04

10 10.00% $1,331.81 50.00% $665.91 13.96% $172.16($186.65)

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Two-Stage Dividend Discount Model

Output from the program

Cost of Equity = 14.71%

Net Income = $72

Net Income without interest income fro $72

Growth rate in EPS = 44.91%

Equity Reinvestment Rate for high gro 149.97%

The dividends for the high growth phase are shown below (upto 10 years)

1 2 3 4 5

Expected Growth Rat 44.91% 44.91% 44.91% 44.91% 44.91%

Net Income $104.85 $151.93 $220.16 $319.03 $462.29

Equity Reinvestment 149.97% 149.97% 149.97% 149.97% 149.97%

FCFE ($52.40) ($75.92) ($110.02) ($159.43) ($231.02)

Cost of Equity 14.71% 14.71% 14.71% 14.71% 14.71%

Cumulative Cost of E 114.71% 131.58% 150.94% 173.14% 198.61%

Present Value ($45.68) ($57.70) ($72.89) ($92.08) ($116.32)

Growth Rate in Stable Phase = 10.00%

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Two-Stage Dividend Discount Model

Equity Reinvestment rate in stable gro 50.00%

Cost of Equity in Stable Phase = 13.96%

Price at the end of growth phase = $18,497.38

Present Value of FCFEs in high growth phase = ($186.65)

Present Value of Terminal Equity Value = $4,782.30

Value of equity in operating assets = $4,595.64

Value of Cash and Marketable Securities = $0.00

Value of equity in firm = $4,595.64

Value per share = $7.04

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Two-Stage Dividend Discount Model

6 7 8 9 10

37.93% 30.94% 23.96% 16.98% 10.00%

$637.61 $834.92 $1,034.98 $1,210.74 $1,331.81

129.98% 109.98% 89.99% 69.99% 50.00%

($191.14) ($83.35) $103.61 $363.29 $665.91

14.56% 14.41% 14.26% 14.11% 13.96%

227.53% 260.32% 297.44% 339.41% 386.79%

($84.01) ($32.02) $34.83 $107.04 $172.16

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Two-Stage Dividend Discount Model

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Two-Stage Dividend Discount Model

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