Chapter 3

Discounted Dividend Valuation

Exhibit 3-1: COKE and HRL: The Earnings and Dividends

Record

COKE

HRL
Payout Ratio
(%)

COKE

Payout
Ratio
EPS ($) DPS ($) (%)

HRL

Payout
Ratio (%)

27

Year
1998

EPS
($) DPS ($)
1.75
1.00

0.52

29

1997

1.79

1.00

56

0.72

0.39

54

1.65

0.45

27

1996

1.73

1.00

58

0.52

0.30

58

29

1.33

0.42

32

1995

1.67

1.00

60

0.79

0.29

37

1.00

39

1.35

0.39

29

1994

1.52

1.00

66

0.77

0.25

32

1.00

93

1.30

0.37

28

1993

1.60

0.88

55

0.66

0.22

33

0.71

1.00

141

1.20

0.35

29

1992 (0.23)

0.88

NM*

0.62

0.18

29

0.37

1.00

270

1.11

0.33

30

Year

EPS ($)

DPS ($)

2006

2.55

1.00

39

2.05

0.56

2005

2.53

1.00

40

1.82

2004

2.41

1.00

41

2003

3.40

1.00

2002

2.56

2001

1.07

2000
1999

*NM = Not meaningful

Source: Standard & Poors Stock Reports, www.sec.edgar-online.com.

57

EPS
Payout
($) DPS ($) Ratio (%)
0.93
0.32
34

Exhibit 3-2: Average Annual Real GDP Growth Rates:

19802006 (in percent)
Time Period
Country

19801989

19901999

20002006

Australia

3.4%

3.3%

3.1%

Canada

3.0

2.4

3.0

Denmark

2.2

2.3

2.0

France

2.1

1.8

2.0

Germany

1.9

1.3

1.3

Italy

2.4

1.5

1.3

Japan

3.9

1.7

1.6

Netherlands

2.0

3.0

1.9

Sweden

2.4

1.8

2.9

Switzerland

1.8

1.1

1.9

United Kingdom

2.4

2.1

2.7

United States

3.1

3.1

2.6

Source: OECD, Datastream, Bloomberg.

Exhibit 3-3: Estimated Price Given Uncertain Inputs

g = 5.75%

g = 6.00%

g = 6.25%

r = 9.00%

$22.13

$24.03

$26.27

r = 9.25%

$20.55

$22.18

$24.08

r = 9.50%

$19.18

$20.59

$22.23

Exhibit 3-4: Estimated PVGO as a Percentage of Price

Company

r*

E1

Price

E1/r

PVGO

PVGO/Price

Google, Inc.

2.09

13.7%

$15.88

$332.0

115.91

216.09

65.1%

McDonalds
Corp.

1.04

9.0

3.45

53.35

38.33

15.02

28.2

Macys Inc.

1.28

10.1

1.30

10.50

12.87

2.37

22.6

*The required rate of return is estimated using the CAPM with the following inputs: the beta
from the Standard & Poors Stock Reports, 4.3 percent (30-year U.S. T-bond rate) for the
risk-free rate of return, and 4.5 percent for the equity risk premium.
Source: Standard & Poors Stock Reports for beta, earnings estimate, and price of each.

Exhibit 3-5: Carl Zeiss Meditec AG

Time

Value

Calculation

Dt or Vt

Present Values
Dt/(1.097)t or
Vt/(1.097)t

D1

0.14(1.15)

0.1610

0.1468

D2

0.14(1.15)2

0.1852

0.1539

D3

0.14(1.15)3

0.2129

0.1613

D4

0.14(1.15)4

0.2449

0.1691

D5

0.14(1.15)5

0.2816

0.1772

D6

0.14(1.15)6

0.3238

0.1858

D7

0.14(1.15)7

0.3724

0.1948

D8

0.14(1.15)8

0.4283

0.2042

D9

0.14(1.15)9

0.4925

0.2141

10

D10

0.14(1.15)10

0.5664

0.2244

10

V10

0.14(1.15)10(1.08)/(0.097
0.08)

35.9817

14.2566

Total

16.0882

Exhibit 3-6: Value of DuPont Common Stock

Time

Value

Calculation

Dt or Vt

Present Values
Dt/(1.105)t or
Vt/(1.105)t

D1

$1.48(1.10)1

$1.6280

$1.4733

D2

1.48(1.10)2

1.7908

1.4666

D3

1.48(1.10)3

1.9699

1.4600

D4

1.48(1.10)4

2.1669

1.4534

V4

14 [1.48(1.10)4/0.40]
= 14 [2.1669/0.40]
= 14 5.4172

75.8404

50.8688

Total

$56.72

Exhibit 3-7: Estimated Value of IBM

Time

Value

Calculation

Dt or Vt

Present
Values
Dt/(1.12)t or
Vt/(1.12)t

D1

1.60(1.14)

$1.8240

$1.6286

D2

1.60(1.14)2

2.0794

1.6577

D3

1.60(1.14)2(1.12)

2.3289

1.6577

D4

1.60(1.14)2(1.12)2

2.6083

1.6577

D5

1.60(1.14)2(1.12)3

2.9214

1.6577

D6

1.60(1.14)2(1.12)4

3.2719

1.6577

D7

1.60(1.14)2(1.12)5

3.6645

1.6577

V7

1.60(1.14)2(1.12)5(1.102)/(0.12 0.102)

$224.3515

101.4852

Total

$113.0600

Exhibit 3-8: Energen

Time

Dt or Vt

Explanation of Dt or Value of Dt or
Vt
Vt
PV at 10%

D1

0.46(1.12)1

$0.5152

$0.4684

D2

0.46(1.12)2

0.5770

0.4769

D3

0.46(1.12)3

0.6463

0.4855

D4

0.46(1.12)4

0.7238

0.4944

D5

0.46(1.12)5

0.8107

0.5034

V5

H-model explained
above

$42.1564

26.1758

Total

$28.6044

Exhibit 3-9: Energen with No Growth in Year 2

Time

Dt or Vt

Explanation of Dt or Vt Value of Dt or Vt PV at
10%

D1

0.46(1.12)1

D2

$0.5152

$0.4684

No growth in Year 2

0.5152

0.4258

D3

0.46(1.12)2

0.5770

0.4335

D4

0.46(1.12)3

0.6463

0.4414

D5

0.46(1.12)4

0.7238

0.4494

V5

H-model explained above

$37.6376

23.3700

Total

$25.5885

Exhibit 3-10: Value of Yang Co. Stock

Year

Dt or Vt

Value of Dt or Vt

Present Value at 12%

Explanation of Dt or Vt

D1

$21.00

$18.75

Dividend set at $21

D2

18.90

15.07

Previous dividend 0.90

D3

17.01

12.11

Previous dividend 0.90

D4

15.31

9.73

Previous dividend 0.90

D5

60.00

34.05

Set at $60

D6

40.00

20.27

Set at $40

D7

40.00

18.09

Set at $40

V7

600.00

271.41

V7 = D8/(r g)
V7 = (40.00 1.05)/(0.12 0.05)

Total

$399.48

Exhibit 3-11: Johnson & Johnson

Present Value of Dt Present Value of Dt
and V6
and
at r = 9.68%
V6 at r = 10%

Time

Dt

$1.8094

$1.6497

$1.6449

1.9722

1.6394

1.6300

2.1497

1.6293

1.6151

2.3432

1.6192

1.6005

2.5541

1.6092

1.5859

2.7840

1.5992

1.5715

2.9789

Subtotal 1

(t = 1 to 6)

$9.75

$9.65

Subtotal 2

(t = 7 to `)

$63.85

$56.05

Total

$73.60

$65.70

Market Price

$66.19

$66.19

Exhibit 3-12: IBM Corporation

Year

ROE (%)

Profit Margin (%) Asset

Turnover

Financial
Leverage

2006

30.6 =

10.30

0.821

3.62

2005

24.7 =

8.77

0.880

3.20

2004

29.3 =

8.77

0.910

3.67

2003

30.1 =

8.54

0.940

3.75

Exhibit 3-13: Hoshino Distributors Pro Forma Financial

Statements (in millions)
Year 1

Year 2

Year 3

Year 4

Year 5

Income statement
Sales

$100.00

$120.00

$138.00

EBIT

20.00

24.00

24.84

24.29

26.72

4.00

4.83

5.35

5.64

6.18

16.00

19.17

19.49

18.65

20.54

Taxes

6.40

7.67

7.80

7.46

8.22

Net income

9.60

11.50

11.69

11.19

12.32

Dividends

1.92

2.30

3.51

4.48

6.16

Total assets

$80.00

$96.00

$110.40

$121.44 $133.58

Total debt

$40.00

$48.32

$53.52

$56.38 $61.81

Equity

$40.00

$47.68

$56.88

$65.06 $71.77

Interest
EBT

$151.80 $166.98

Balance sheet