Professional Documents
Culture Documents
Risk- Adjusted
Expected Rates of
Return and the
Dividends Valuation
Approach
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Discount
Rate)
t 1
n
Chapter: 11
Chapter: 11
Chapter: 11
capital structure.
New Levered Market Beta Unlevered Market Beta x [1 (1 Income Tax Rate)
x (New Market Value of Debt/New Market Value of Equity)]
Chapter: 11
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11
Dividends-Based Valuation
The rationale for using expected
Chapter: 11
12
issues stock
Chapter: 11
13
....
1
2
T
( 1 RE ) ( 1 RE )
( 1 RE ) ( 1 RE )T
V0
D1
D2
[NI T ( 1 g)] BVT [BVT ( 1 g)]
....
( 1 RE )1 ( 1 RE )2
(RE -g) ( 1 RE )T
Chapter: 11
14
elements:
Dividend (Discount rate = RE)
Expected future dividends (Dt) for periods 1
Chapter: 11
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followed.
Under U.S. GAAP and IFRS, clean surplus is
Chapter: 11
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17
Forecast Horizon
Represented by periods 1 through T in
equilibrium.
Difficult for young, high-growth firms.
Chapter: 11
18
slide 14.
Use long-term growth rate assumption
(1+ g) uniformly on the year T+1 income
statement and balance sheet projections
to derive the dividends for the year T+1
correctly.
Thus: DT 1 NI T 1 BVT BVT 1
19
What now?
Once valuation model is applied, then
Conduct sensitivity analysis:
Vary cost of equity capital rate (RE)
Vary long-run growth rate (g)
Discount rate assumptions
Vary these parameters and assumptions
Chapter: 11
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Chapter: 11
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Chapter: 11
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