# Time Warner Inc. (TWX) | Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

## Intrinsic Stock Value (Valuation Summery)

Time Warner Inc., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 13.77%
0 DPS01 1.04
1 DPS1 1.05 = 1.04 × (1 + 1.32%) 0.93
2 DPS2 1.10 = 1.05 × (1 + 3.95%) 0.85
3 DPS3 1.17 = 1.10 × (1 + 6.58%) 0.79
4 DPS4 1.27 = 1.17 × (1 + 9.20%) 0.76
5 DPS5 1.43 = 1.27 × (1 + 11.83%) 0.75
5 Terminal value (TV5) 82.35 = 1.43 × (1 + 11.83%) ÷ (13.77% – 11.83%) 43.21
Intrinsic value of 's common stock (per share) \$47.28
Current share price \$60.07

1 DPS0 = Sum of last year dividends per share of 's common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

## Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.78% Expected rate of return on market portfolio2 E(RM) 13.09% Systematic risk (β) of 's common stock βTWX 1.07 Required rate of return on 's common stock3 rTWX 13.77%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rTWX = RF + βTWX [E(RM) – RF]
= 2.78% + 1.07 [13.09% – 2.78%]
= 13.77%

## Dividend Growth Rate (g)

### Dividend growth rate (g) implied by PRAT model

Time Warner Inc., PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Cash dividends   1,011  997  971  897  901
Net income (loss) attributable to Time Warner Inc. shareholders   3,019  2,886  2,578  2,468  (13,402)
Revenues   28,729  28,974  26,888  25,785  46,984
Total assets   68,304  67,801  66,524  65,730  113,896
Total Time Warner Inc. shareholders' equity   29,877  29,957  32,940  33,383  42,288
Ratios
Retention rate1   0.67 0.65 0.62 0.64
Profit margin2   10.51% 9.96% 9.59% 9.57% -28.52%
Asset turnover3   0.42 0.43 0.40 0.39 0.41
Financial leverage4   2.29 2.26 2.02 1.97 2.69
Averages
Retention rate 0.64
Profit margin 2.22%
Asset turnover 0.41
Financial leverage 2.25

Dividend growth rate (g)5 1.32%

2012 Calculations

1 Retention rate = (Net income (loss) attributable to Time Warner Inc. shareholders – Cash dividends) ÷ Net income (loss) attributable to Time Warner Inc. shareholders
= (3,019 – 1,011) ÷ 3,019 = 0.67

2 Profit margin = 100 × Net income (loss) attributable to Time Warner Inc. shareholders ÷ Revenues
= 100 × 3,019 ÷ 28,729 = 10.51%

3 Asset turnover = Revenues ÷ Total assets
= 28,729 ÷ 68,304 = 0.42

4 Financial leverage = Total assets ÷ Total Time Warner Inc. shareholders' equity
= 68,304 ÷ 29,877 = 2.29

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.64 × 2.22% × 0.41 × 2.25 = 1.32%

### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$60.07 × 13.77% – \$1.04) ÷ (\$60.07 + \$1.04) = 11.83%

where:
P0 = current price of share of 's common stock
D0 = last year dividends per share of 's common stock
r = required rate of return on 's common stock

### Dividend growth rate (g) forecast

Time Warner Inc., H-model

Year Value gt
1 g1 1.32%
2 g2 3.95%
3 g3 6.58%
4 g4 9.20%
5 and thereafter g5 11.83%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 1.32% + (11.83% – 1.32%) × (2 – 1) ÷ (5 – 1) = 3.95%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 1.32% + (11.83% – 1.32%) × (3 – 1) ÷ (5 – 1) = 6.58%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 1.32% + (11.83% – 1.32%) × (4 – 1) ÷ (5 – 1) = 9.20%