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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)

Costco Wholesale Corp., 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 Costco's common stock (per share) $
Current share price $

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.

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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 Costco's common stock βCOST
Required rate of return on Costco's common stock3 rCOST %

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]
= % + [% – %]
= %

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Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Costco Wholesale Corp., PRAT model

 
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
Net income attributable to Costco
Net sales
Total assets
Total Costco stockholders' equity
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 attributable to Costco – Cash dividends declared) ÷ Net income attributable to Costco
= () ÷ =

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

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

4 Financial leverage = Total assets ÷ Total Costco stockholders' 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 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

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Dividend growth rate (g) forecast

Costco Wholesale Corp., H-model

 
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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