MAGGIE K
catherine3099
ddm_new.docxRunning Header: FINANCE DBS 1
FINANCE DBS 2
7.1 Dividend Discount Model (DDM)
The dividend discount model is a formula used to evaluate a company’s worth through the estimation of dividend and discount. This is done through evaluation of the financial stock of the company and the expected cash flow to be generated within a certain period of time. It is commonly used to calculate share price.
The nature of the model entails assumptions concerning the company’s dividend payments and the growth pattern as well as future interest rates. It is easier to narrow down the value of the company’s stock without considering the market condition regardless of stock value in other related companies. It is important to note that despite the subject company experiencing different growth phases, there is provision of great control over the near-term dividends, which are most valuable.
The disadvantage with this model is, based on growth stock. For instance, if the stock cannot pay a dividend, more general version of the discounted dividend model must be used to value the stock. And again the presumption of a steady and perpetual growth rate below the cost of the capital may give unreasonable value of the company.
The DDM evaluation value can be used in established firms to determine whether their share price is correctly valued. The most current DDM report for DBS Bank Ltd released within the past 12 months show a $26.8 worth value with $0.6 dividend per share.
Dividend Growth Rate (g) for DBS Singapore
The dividend growth rate is given by the product of the Return on the Equity (ROE) of DBS and the Retention Rate (RR). The RR is the quotient of the Retained Earnings on every share and the Earnings on every share (Saltelli, 2008).
|
DBS (FY 2015) |
Values |
|
Earnings per share (EPS) |
1.73 |
|
Dividends Per Share |
0.6 |
|
Retained Earnings Per Share |
1.13 |
|
Retention Rate (RR) |
65.31% |
|
Formula RR = Retained EPS/EPS |
|
Expected Growth Rate (g) |
ROE |
RR |
g |
|
Formula: g = ROE x RR |
11.20% |
65.31% |
7.31% |
In year 2015, DBS Group Holdings Ltd’s Divdends Per Share was amounted at $0.60. Return on equity also increased from 10.9% in Year 2014 to 11.2% in Year 2015. DBS Group Holdings Ltd’s RR is of a considerable fair percentage of 65.31%. This enhances the growth of DBS, and in the near future, it might expand its structures in the forms of assets. This will attract more shareholders and improve more on earnings on shares. The lesser the percentage of RR, it indicates the growth of a company, and lesser the earning per shares are being retained. This is due to companies having limited access to finances, thus they have to retain their earnings on shares.
Forecast Dividends
|
Year |
2015 |
2016 |
2017 |
|
|
|
Prediction |
Prediction |
|
Period |
0 |
1 |
>2 |
|
Required Rate Of Return: ke |
0.112 |
0.112 |
0.112 |
|
Expected Dividend Growth: g |
0.0731 |
|
|
|
Assumed change in g |
|
|
|
|
Dividend ($) |
0.6 |
|
|
|
Present Value ($) |
|
|
|
|
Net Present Value ($) |
|
|
|
By forecasting on the future years and the expected cash flows on the shares of DBS, they value of the stock is expected to be worth SGD2.60(Boehm & DeGennaro, n.(Saltelli, 2008).
Sensitivity Analysis
This analysis is based on the assumptions about the future performance of the company and the shares’ value as predetermined to be SGD 2.60 basing on two factors that directly affect the value of the stocks. The two factors considered are Retained Earnings per Share and the Earnings per share. The behavior of the RR communicates to the investors and the potential investors the value of the stocks(Saltelli, 2008).
|
Sensitivity |
EPS |
0 |
0.5 |
1 |
1.5 |
2 |
|
RES |
|
|
|
|
|
|
|
0 |
|
2.6 |
2.98 |
1.84 |
2.66 |
2.75 |
|
2 |
|
2.14 |
2.4 |
2 |
2.88 |
2.4 |
|
4 |
|
1.95 |
2.3 |
2.39 |
|
2.3 |
|
6 |
|
2 |
2.88 |
3 |
2.33 |
2.88 |
|
8 |
|
2.9 |
2.75 |
2.98 |
1.95 |
2 |
|
10 |
|
2.65 |
2.74 |
2.4 |
2 |
2.6 |
|
12 |
|
2.1 |
2.7 |
2.3 |
2.9 |
2.14 |
|
14 |
|
1.9 |
2.68 |
2.88 |
2.65 |
1.95 |
|
16 |
|
1.84 |
2.66 |
2.75 |
2.1 |
2 |
|
18 |
|
2.1 |
2.6 |
2.74 |
1.9 |
2.9 |
|
20 |
|
1.5 |
2.59 |
2.7 |
1.84 |
2.65 |
|
22 |
|
2.55 |
2.56 |
2.68 |
2.1 |
2.1 |
|
24 |
|
2.62 |
2.5 |
2.66 |
1.5 |
1.9 |
|
26 |
|
2.5 |
2 |
2.6 |
2.68 |
2 |
References
W, C. B. (2015, October 8). The Dividend Discount Model - Dividend.com. Retrieved from http://www.dividend.com/dividend-education/the-dividend-discount-model/
Boehm, T. & DeGennaro, R. A Discrete Choice Model of Dividend Reinvestment Plans: Classification and Prediction. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1021070
Saltelli, A. (2008). Global sensitivity analysis. Chichester, England: John Wiley.
DBS Group Holdings Ltd's. (2015). Retrieved from https://www.dbs.com/newsroom/DBS_full_year_2015_net_profit_rises_to_record_SGD_4_45_billion
Angela, T. (2016, February 22). DBS Q4 net profit up 20%, FY2015 up 10% as total income crosses S$10b, Companies & Markets - THE BUSINESS TIMES. Retrieved from http://www.businesstimes.com.sg/companies-markets/dbs-q4-net-profit-up-20-fy2015-up-10-as-total-income-crosses-s10b
