This implementation scheme of DDM uses the calculations done in Graham-Rao method of analysis.
You have calculated growth rate in EPS using 7 year adjusted EPS figures. (The method involves equating the adjusted EPS series to a geometric progression and the 'r' of geometric progression is taken as the growth rate).
Do similar calculation for growth rate in Dividend per share using 7 year adjusted DPS figure.
There can be difference in growth rates.
Take the average of growth rates.
Assume that this growth rate will continue for next 6 years.(1 to 6 years from the latest year for which DPS is available)
Growth for the next 6 years (7 to 12) will be 50% of it.
Growth for further 6 years (13 to 18) will be 50% of it.
Go on reducing it till you reach terminal growth rate assumed for the company.
Required Rate of Return
Risk free rate of return
364-Tbill rate is 4.60% on 30.1.2009
Source: http://stcipd.com/UserFiles/File/WeeklyReportFeb02.pdf
Risk Premium
The risk premium is to be taken as 10%. For India it 8.75% on the basis of geometric average or mean. (Reference: IIM Ahmedabad Working paper number WP.No.2006-06-04, “A First Cut Estimate of Equity Risk Premium in India”, J R Varma and S K Barua).
Because at the present time (February 2009) risk aversion is high, using 10% as the risk premium demanded by the investor is appropriate.
Mature Growth Rate
Make a ranking of the companies in the industry to which the company belongs. Make three groups. First five, next five and the rest.
If the company is in the first five, Mature growth rate = 6%
If the company is in the next five, mature growth rate = 5%
If the company is in the third group, mature growth rate = 4%
Original knol - http://knol.google.com/k/narayana-rao/dividend-discount-model-an/2utb2lsm2k7a/ 1060
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