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7.1.1 Dividend Growth Rate (g)

To determine the Dividend Growth Rate (g), OCBC’s Retention Rate (RR) is multiplied by the Return on Equity (ROE) derived by DuPont analysis. RR is determined by retained earnings per share over earnings per share as shown below:

Therefore, g is calculated as below:

As g is also reflection of a company’s share value, a change in its value signifies a change in either ROE, RR or both. This indicates that when the market conditions fluctuate, either or both variables will rise or fall accordingly. To illustrate, g is assumed to decrease for the year 2016 at the rate of 3% according to economic outlook determined in the Part 1 analysis. In addition, g is assumed to rise constantly thereafter at 20.64% based on the average rate of change in g over the past 5 years (Appendix 3).

The Required Rate of Return (E(Ri) or ke) is assumed to be constant as Rf has shown minimal to insignificant fluctuations, Rm is projected at a constant rate, and beta indicates that OCBC's share value is relatively calm and therefore less likely to fluctuate significantly.

7.1.2 Forecast Dividends

Therefore, by using the Infinite Period DDM model OCBC’s intrinsic share value is determined as below:

The determined Intrinsic Share Value for OCBC will be SGD 3.53. When compared to the current share price of $9.10 as of 21 March 2016 it shows that the share price of OCBC is OVERVALUED (Yahoo Finance 2016).

7.1.3 Sensitivity Analysis of DDM

A Sensitivity Analysis is performed to illustrate the impact of possible variations to 2 significant variables, Required Rate of Return (ke) and Dividend Growth Rate (g), which affect a company’s share value, the assumed Net Present Share Value of SGD 3.53 (Investopedia 2016). This sensitivity analysis will amplify the investor’s confidence in the DDM as both variables ke and g are projected based on assumptions and forecasts which are uncertain characteristically. The table below presents the results of the Sensitivity analysis: