Question

Use the following information on Disney to answer the case questions.

• Disney’s current stock price is $140.00 per share. The average growth rate of the company’s dividend has been 17.7% from 2004 through 2018.
• Disney’s return on equity is 28.0% and the company retains approximately 80.0% of its profits while paying out the remaining 20.0% in dividends.
• The company’s stock currently trades at 21.21 times its current year earnings estimate of $6.60 per share.
• Analysts expect the company to earn $6.19 per share in 2020 and $6.93 in 2021.
• Disney’s peers in media networks trade at 25.5 times their current-year earnings estimates while peers in parks, experiences and consumer products at 21.9; studio entertainment at 19.1 and DTCI at 14.1.
• Assume the expected return for Disney’s stock is 6.9%.

What is the Constant Growth Model, the Multi-Stage Growth Model, Discounted Dividend Model, and Market Multiples Approach?

Answer 1

1.) Constant Growth Model:
The constant growth model, also called the Gordon Growth Model, discounts future cash flows, or dividends, under the idea that a company's dividends grow at a continuing rate forever. The intrinsic value of a company's equity is calculated by dividing a company's dividend for next year (D1), by the difference between the stock's expected return (k), and its dividend growth rate (g).

There are very few companies who grow their dividends at a constant growth rate, which makes the weakness of this model.

Also, as per the mathematical formula, denominator (k - g) has to be a positive number.

From Disney's data, it is also clear that the company has not made a constant growth in its dividend.

2.) Multi Stage Growth:
This model basically modifies the flaw of constant growth model, that is no companies increase their dividends at a constant rate forever. This model assumes that companies can grow their dividends in two periods. First period is a fast growth that is for a particular period of time and second is a period of slower growth which lasts forever.

3.) Discounted Dividend Growth:
The three steps to calculate a stock's instrinsic value -
(i) Calculate dividends for future years"
(ii) Calculate terminal value of the stock
(iii) Arrange dividends in a timeline and calculate stock's net present value (NPV)

4.) Market Multiples Approach:
All the above models discussed are dividend discount models as they all are calculating the present value of the future cash flows , dividends.