terminal value in DDM

[suspense]

.

[suspense]

@edupristine

this is not the correct formula, here the correct formula is So= D/k-G.

Hence, It shows k-g in denominator . Let’s we do one example here.

So=?

D=4

K=12%

G= 6%,and the second one is 8%

Here, 4/12%-6%= 66.66

If we put G= 8%

So= 4/12%-8%=100.

Greater the growth rate more the value of stock, And if G>k the formula will not work.

Austin+1 347 647 9001

Thanks, how do you treat the growth rate of the company if it is less than that of the economy, also why does most DDM use fives years. What is the assumption on the choice of number year used.

[I-will-pass]

Edupristine wants you to call the number…

forget the five years. Its just an example.

Growth can be small. In the GGM your terminal value will be small as a consequence.

[busprof]

Most examples you see in textbooks use 3-5 years as the “Supernormal growth” period because it’s long enough to give you some practice in calculating grwoth in dividends but short enough that you don’t need all day to solve the problem. In practice, the number of years of supernormal growth varies by industry and (within industry) by things like product differentiation, barriers to entry, etc…). I don;t have my trusty copy here at the moment (I’m at home), but Damodaran (the academic God of all things valuation) has a great discussion of this in his Valuation text. So if you want nore info, that’s a good source.

If you want to see one of the videos I put together for my investments class, it’s at

http://www.screencast.com/users/financeprof/folders/BUS320/media/23708527-78fd-4008-b755-d5aea601c176

The whole thing takes about a half-hour, but some of you might find it useful. It’s poretty basic - mostly intended as a refresher for those who had crappy instructors in the prerequisites class. But it does cover the holding period, constant growth, and non-constant growth models.

[S2000magician]

@busprof

. . . mostly intended as a refresher for those who had crappy instructors in the prerequisites class.

C’mon, prof: don’t hold back; tell us how you really feel.

[busprof]

@S2000magician

@busprof

. . . mostly intended as a refresher for those who had crappy instructors in the prerequisites class.

C’mon, prof: don’t hold back; tell us how you really feel.

S’truth - at a state university with graduate students teaching the core finance class, there’s a HUGE variance in the level of instruction. Not surprising - the PhD students need to be able to show good teaching evaualtions when they go on the job market, and the easiest way is to dumb down the intro class and give the students an easy ride.

Unfortunately, the finance majors end up getting boned, since later courses draw heavily on the core. So rather than let the poor chumps that caught the wrong instructor for the core class end up screwed in my class, I started putting together refresher videos.

I’d be nicer, but my giveashitter is busted.