The previous section
provided a historical perspective to the development of the
dividend model. In practice the dividend model is applied
in different ways. We can classifiy these different ways
in terms of how the numerator (i.e., expected dividends) and the
denominator (discount rate) are estimated.
The Valuation Tutor software
provides you with a lot of flexibility for how you can apply
these different forms of the dividend model. In
particular, it lets you apply it in the following ways:
In
the above screen beow the Dividend Model are the following sub
categories:
Discount Rates: Two methods for
estimating discounting rates are provided --- CAPM and MCPM.
CAPM stands for the Capital Asset Pricing Model and it discussed
in every standard finance textbook. The discount rate in
this model depends upon three variables -- a stock's beta (i.e.,
how the stock's returns vary with the general market), the
current yield to maturity on a longer maturity Treasury
instrument, and the premium you expected to get from the stock
market as a whole over the yield to maturity from the Treasury
instrument.
A second relative technique the MCPM is
also provided. This technique starts with the yield
to maturity associated with a stock's credit rating (e.g., AAA,
AA, A, BBB etc.,) and adjusts this for the additional premium
required using a put option to insure that a stock's return does
not fall below the return from it's debt's risk class.
The remaining selections relate to how the numerator or
expected dividend is estimated.
The next section provides operational details for the
different techniques starting with the simple form which uses
the analyst forecast of next year's dividend..
These variations affect how we
compute dividends and how we calculate growth rates.
In the simple model, you “know” the value to put in.
In the other variations, the values are imputed from
other variables.
All the variations are repeated with the two stage model.
Valuation Tutor makes it easy for you to work across all
these variations, learn the inputs required, and begin to
understand the relationship between items that appear in the
financial statements and the intrinsic value.