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## Dividend Discount Model (DDM)

Difficulty: Intermediate

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 Summary)

Broadcom Ltd., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at %
0 DPS01
1 DPS1 = × (1 + %)
2 DPS2 = × (1 + %)
3 DPS3 = × (1 + %)
4 DPS4 = × (1 + %)
5 DPS5 = × (1 + %)
5 Terminal value (TV5) = × (1 + %) ÷ (% – %)
Intrinsic value of Broadcom's common stock (per share) \$
Current share price \$

1 DPS0 = Sum of last year dividends per share of Broadcom'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.

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### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF % Expected rate of return on market portfolio2 E(RM) % Systematic risk (β) of Broadcom's common stock βAVGO Required rate of return on Broadcom's common stock3 rAVGO %

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 rAVGO = RF + βAVGO [E(RM) – RF]
= % + [% – %]
= %

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### Dividend Growth Rate (g)

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

Average Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014 Nov 3, 2013 Oct 28, 2012
Selected Financial Data (USD \$ in millions)
Cash dividends declared and paid to ordinary shareholders
Net income (loss) attributable to ordinary shares
Net revenue
Total assets
Ratios
Retention rate1
Profit margin2 % % % % % %
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin %
Asset turnover
Financial leverage
Dividend growth rate (g)5 %

2017 Calculations

1 Retention rate = (Net income (loss) attributable to ordinary shares – Cash dividends declared and paid to ordinary shareholders) ÷ Net income (loss) attributable to ordinary shares
= () ÷ =

2 Profit margin = 100 × Net income (loss) attributable to ordinary shares ÷ Net revenue
= 100 × ÷ = %

3 Asset turnover = Net revenue ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Total Broadcom Limited shareholders' equity
= ÷ =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × % × × = %

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$ × % – \$) ÷ (\$ + \$) = %

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

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#### Dividend growth rate (g) forecast

Year Value gt
1 g1 %
2 g2 %
3 g3 %
4 g4 %
5 and thereafter g5 %

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)
= % + (% – %) × (2 – 1) ÷ (5 – 1) = %

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= % + (% – %) × (3 – 1) ÷ (5 – 1) = %

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= % + (% – %) × (4 – 1) ÷ (5 – 1) = %

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