| Assignment 3: Dividend Discount Model. Complete and submit on Due Date |
| Look at the DDM example below. Now look up electric utility company Eversource Energy (formerly Northeast Utilities), symbol ES, on Bloomberg. |
| Using the data available and provided on Bloomberg, find the value of ES. What is ES's Intrinsic Value? Is ES Overvalued, Fairly Valued or Undervalued? |
| Use the Analyst Estimates to derive your value (HINTS: Use the Growth Est. for the Next 5 Years (per annum) and assume a Terminal Growth Rate of 2%, since it is a slow growth utility. Calculate the Required Rate of Return). |
| Explain your answer. |
| Perform this analysis for 2 other stocks in your portfolio. Explain your conclusions on these stocks as well. |
| Dividend Discount Model Guideline Example |
| Assume Security A has generated annual dividend growth of 10.0% over the past 3 years. The most recent annual dividend is $2.00. |
| Assume Security A will continue to increase dividends at 10.0% for the next 5 years before reducing its dividend growth to 5% for the long term. |
| Also assume that the required return for A's stock is 15%. It is currently trading for $35.59 |
| Current Stock Price of A | | | 35.59 |
| Growth rate for years 1-5 | | | | 0.1 | g1 |
| Growth rate for years 6+ | | | | 0.05 | g2 |
| Required return | | | | 0.15 | k |
| Year | | CF | PVCF |
| 0 | D | 2.00 |
| 1 | D | 2.20 | 1.9130434783 |
| 2 | D | 2.42 | 1.8298676749 |
| 3 | D | 2.66 | 1.7503082107 |
| 4 | D | 2.93 | 1.6742078537 |
| 5 | D | 3.22 | 1.6014162079 |
| 5 | V | 33.82 | 16.8148701833 |
| | | PV | 25.5837136088 |
| Current Stock Price of A | | | 35.59 |
| | | Difference | -10.0062863912 |
| | | Intrinsic Value | | < | Price |
| | | 25.5837136088 | | < | 35.59 | | < Price, So Sell |
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assignment_3_dividend_discount_model.xls
