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Microsoft Excel LibreOffice Calc


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)

Costco Wholesale Corp., dividends per share (DPS) forecast

USD $

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

1 DPS0 = Sum of last year dividends per share of Costco'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)

Microsoft Excel LibreOffice Calc
Assumptions
Rate of return on LT Treasury Composite1 RF hidden%
Expected rate of return on market portfolio2 E(RM) hidden%
Systematic risk (β) of Costco's common stock βCOST hidden
Required rate of return on Costco's common stock3 rCOST hidden%

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

2 See Details »

3 rCOST = RF + βCOST [E(RM) – RF]
= hidden% + hidden [hidden% – hidden%]
= hidden%


Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Costco Wholesale Corp., PRAT model

Microsoft Excel LibreOffice Calc
Average Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Selected Financial Data (USD $ in millions)
Cash dividends declared hidden hidden hidden hidden hidden hidden
Net income attributable to Costco hidden hidden hidden hidden hidden hidden
Net sales hidden hidden hidden hidden hidden hidden
Total assets hidden hidden hidden hidden hidden hidden
Total Costco stockholders' equity hidden hidden hidden hidden hidden hidden
Ratios
Retention rate1 hidden hidden hidden hidden hidden hidden
Profit margin2 hidden% hidden% hidden% hidden% hidden% hidden%
Asset turnover3 hidden hidden hidden hidden hidden hidden
Financial leverage4 hidden hidden hidden hidden hidden hidden
Averages
Retention rate hidden
Profit margin hidden%
Asset turnover hidden
Financial leverage hidden
Dividend growth rate (g)5 hidden%

2017 Calculations

1 Retention rate = (Net income attributable to Costco – Cash dividends declared) ÷ Net income attributable to Costco
= (hiddenhidden) ÷ hidden = hidden

2 Profit margin = 100 × Net income attributable to Costco ÷ Net sales
= 100 × hidden ÷ hidden = hidden%

3 Asset turnover = Net sales ÷ Total assets
= hidden ÷ hidden = hidden

4 Financial leverage = Total assets ÷ Total Costco stockholders' equity
= hidden ÷ hidden = hidden

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


Dividend growth rate (g) implied by Gordon growth model

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

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


Dividend growth rate (g) forecast

Costco Wholesale Corp., H-model

Microsoft Excel LibreOffice Calc
Year Value gt
1 g1 hidden%
2 g2 hidden%
3 g3 hidden%
4 g4 hidden%
5 and thereafter g5 hidden%

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

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

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