Calculating the value of a stock using the Dividend Discount Model (DDM) with a financial calculator:

Step 1: Calculate Dividends for the Next Four Years:

• Year 1: $5.75
• Year 2: $6.6125
• Year 3: $7.60438
• Year 4: $8.74502
  • Year 2 Dividend ($6.6125):
    • N = 2 (for 2 years)
    • I/Y = 12 (for the discount rate of 12%)
    • PMT = 0 (since this is not an annuity)
    • FV = 6.6125 (future value, which is the dividend)
    • Compute PV by pressing CPT > PV. This gives you the present value for Year 2's dividend (-5.27)
  • Year 3 Dividend ($7.60438):
    • N = 3 (for 3 years)
    • I/Y = 12 (for the discount rate of 12%)
    • PMT = 0 (since this is not an annuity)
    • FV = 7.60438 (future value, which is the dividend)
    • Compute PV by pressing CPT > PV. This gives you the present value for Year 2's dividend (-5.41)
  • Year 3 Dividend ($8.74502):
    • N = 4 (for 4 years)
    • I/Y = 12 (for the discount rate of 12%)
    • PMT = 0 (since this is not an annuity)
    • FV = 8.74502 (future value, which is the dividend)
    • Compute PV by pressing CPT > PV. This gives you the present value for Year 2's dividend (-5.56)
  • Terminal Value ($145.75033):
    • N = 4 (for 4 years)
    • I/Y = 12 (for the discount rate of 12%)
    • PMT = 0 (since this is not an annuity)
    • FV = 145.75033 (future value, which is the dividend)
    • Compute PV by pressing CPT > PV. This gives you the present value for Year 2's dividend (-92.63)

Step 2: Calculate the Terminal Value:

Again, we've calculated this to be $145.75033.

Step 3: Discount Each Future Cash Flow Back to Present Value:

We use the Time Value of Money (TVM) functionality for each cash flow.

1. For each dividend and the terminal value, we'll calculate the present value (PV) one at a time, as follows:
   • Year 1 Dividend ($5.75):
     • N = 1 (for 1 year)
     • I/Y = 12 (for the discount rate of 12%)
     • PMT = 0 (since this is not an annuity)
     • FV = 5.75 (future value, which is the dividend)
     • Compute PV by pressing CPT > PV. This gives you the present value for Year 1's dividend (-5.13)

Step 4: Sum Up the Present Values of All Future Cash Flows

5.13 + 5.27 + 5.41 + 5.56 + 92.63 = 114.00

Answer rating: 100% (QA)

To calculate the present value of all future cash flows using the Dividend Discount Model DDM with a ... View the full answer