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# Union Pacific Corp. (UNP)

## 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)

Union Pacific 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 Union Pacific Corp.’s common stock (per share) \$
Current share price \$

Based on: 10-K (filing date: 2019-02-08).

1 DPS0 = Sum of last year dividends per share of Union Pacific Corp.’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 Expected rate of return on market portfolio2 E(RM) Systematic risk (β) of Union Pacific Corp.’s common stock βUNP Required rate of return on Union Pacific Corp.’s common stock3 rUNP

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 rUNP = RF + βUNP [E(RM) – RF]
= + []
=

### Dividend Growth Rate (g)

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

Union Pacific Corp., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD \$ in millions)
Cash dividends declared
Net income
Operating revenues
Total assets
Common shareholders’ equity
Ratios
Retention rate1
Profit margin2
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin
Asset turnover
Financial leverage
Dividend growth rate (g)5

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-05), 10-K (filing date: 2015-02-06).

2018 Calculations

1 Retention rate = (Net income – Cash dividends declared) ÷ Net income
= () ÷ =

2 Profit margin = 100 × Net income ÷ Operating revenues
= 100 × ÷ =

3 Asset turnover = Operating revenues ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Common shareholders’ equity
= ÷ =

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

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

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

where:
P0 = current price of share of Union Pacific Corp.’s common stock
D0 = last year dividends per share of Union Pacific Corp.’s common stock
r = required rate of return on Union Pacific Corp.’s common stock

#### Dividend growth rate (g) forecast

Union Pacific 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) =