Heads Up4: DDM or no DDM

Profitable company with earnings growing at 5% annually, pays a good dividend of \$1.25 every year. Would you use DDM to value the stock or not? Why?

No. Because dividend policy (always \$1.25) does not bear a relationship to the company’s growing profitability (at 5%). =)

Yep.

Dreary put up some tricky swaps/ intercorporate/ mutlinational problems make us work yo!

No DDM, there is no relation between EPS g and Div.

ok, here is a quick one:

Annualized LIBOR spot rates and the present value factors today are:

Rate________ Present value factor

90-day LIBOR 4.2%____ 0.98961

180-day LIBOR 4.8%____ 0.97656

270-day LIBOR 5.0%____ 0.96386

360-day LIBOR 5.2% ___0.95057

Total _____________3.88060

Based on a notional principal of \$40,000,000, the annualized swap rate is closest to:

A. 1.27%.

B. 2.54%.

c. 5.08%.

C

I agree, C. Thanks for putting all the PV factors together. I notice in a lot of the exams you have to calculate them.

Thanks Dreary agree C 1-z4/ sum x 4

Right…if they don’t give you the factors, they are simply 1 / [(1+rate*(days/360)]

Dreary, if only the exam questions were like these…basically free points for 80% of candidates…It is the tricks and turns and the minutae of the curriculum where the extra points are to be had!

Right, but some people want to get the basic ideas first. Yet in another thread I asked a more challenging problem which asked to find the ERP from DDM…that no one liked, even though the book has a section on how to find ERP from different sources!