Equity intrinsic value

CFA Level I Equities
#1

Hey guys,

It’s not a big question but could be confusing to me if it’s true, is the Gordon (constant) growth DDM’related’ to the present value model category? And if not where would it fall under, multiplier model, asset based model… or is it just out there all by itself with no group attached to it? Done some reading and searches but nothing really definitive about the group it’s attached to.

The reason I’m asking is because I came across a question where I might have over complicated it a little:

An increase in the dividend payout ratio will _mos_t likely increase the intrinsic value when using a(n):

multiplier model.

asset-based valuation model.

present value model.

An increase in the dividend payout ratio will increase the cash expected to be distributed to shareholders. The Dividend discount model is the present value of the cash expected to be distributed to shareholders. Therefore an increase in the dividend payout ratio will increase the intrinsic value in a present value model.

I understand that having a higher dividend payout ratio will increase the dividend price and the intrinsic value Po=(D/1+K), but where I’m confusing myself is that I thought that DDM was a present value model as well? If so then increasing the dividend payout ratio will in turn lower the growth rate value [g=(1-div payout ratio) x ROE] and the difference between Ke-g widens (bigger denominator) and lowers the intrinsic value? Vo=D/Ke-g

I’m just struggling to wrap my head around how on one hand it increases intrinsic value and on the other it lowers it… But if DDM models aren’t part of the present value models then I guess there’s no cause for concern.

Thanks in advance

#2

It is a present value model (you calculate the present value of the dividends).

And you’re correct when saying that increasing the payout ratio does not always result in an increase in the price. But it does sometimes. And since you don’t use the payout ratio for any multiplier or asset-based model, the only possible answer is ‘present value models’.

#3

Now aside from the question how would one analyse a div payout increase? If one gives a increase in price D/1+k and the other a decrease D/k-g… is there some rule of thumb that applies to which formula is more suitable?