How would you calculate value of DIS using the DDM?
Dividend: 1.24
ROE: 18.28%
Payout: 36.9%
G: 11.53%
What is a good number to use as the discount rate in a real world situation like this?
And this is why DDM doesn’t work “in practice.” Tell your prof that.
If this is indeed for a homework assignment, you could back into the implied cost of equity using your inputs and the current mkt cap.
CF(1+g)/(k-g)
In practice, no one uses it
From the perspective of a private equity guy with 10+ years experience, I would agree.
I would never dare tell someone they should spend millions of dollars on something because a dividend discount model tells me so.
I would do it if I can show how they can make money on those millions, however.
Well in practice, DDMs should use the maximum amount of dividends a company can afford to pay out with the given reinvestment rate, at which case, it’s the same as a FCFE valuation.
Ah DDM, I remember thinking in level II, both DDM and CAPM seemed so academic, does anyone actually use this crap? Ignored it ever since.
But aren’t a lot of people using multi-factor CAPM models? Study historic numbers, isolate the market premium, and model what drove it? Then make up a fancy strategy name that contains the word “alpha”? And proceed to underperform?
DDM isn’t total hokum though, for pass through entities like MLPs, dividends are the most important metric, so there you can use some form of DDm.