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Isn't Dsub1 the current dividend multiplied by (1+div growth rate)? D1 should be the NEXT div to pay. In short, it should have been $8 * 1.01 = $8.08. The final formula would have been the $8.08/ (.08-.01). The intrinsic value using that formula would have been $115.43.
Buffett views retained earnings as the same or better than a dividend (no taxes for reinvested earnings), and has an equity bond theory that that accumulated value of “owner earnings” belongs to the investor…. by discounting the sum of all future owner earnings back to today in a similar manner, you can value a stock that doesn’t pay a dividend. Some people make the mistake of thinking equity bond is the initial 1/PE or E/P yield, but that isn’t how Buffett looks at it. I don’t know how bonds work or how Buffett values a bond, and I think Buffett is starting with that initial framework to build his equity bond theory but he has mentioned coupon rates and Mary Buffett has a few different books where she explains it a bit.
Correct! The $100 is the cashflow that we expect to receive from selling the stock 4 years from now. We expect the stock price to be $100 and we will sell the stock at that time
Good question! In the Gordon Growth Model, if the growth rate (g) is greater than the required return (r), the model will not hold, as it will predict a negative stock price, which is not realistic. This scenario typically suggests an overvaluation, unrealistic growth expectations, or too low of a required return.
You should do a problem where there is a period of high growth/low growth and constant growth thereafter. Kind of ties the Gordon model with a typical problem
Because R is risk associated with a stock and g is growth rate associated with the stock. So you minus the risk from the growth rate which is positive to a stock to obtain less risk since potential growth reduces overrall risk in a firm. Hope it helps. Thats the best way i can explain
It tells you if the company is correctly valued. If the Intrinsic value is higher than its current stock price, then the stock is undervalued and is selling for less than its actually worth so you should buy more of it.
It depends on the way the question was phrased in that case. They may say, "the dividend will grow by 3% each of the next 2 years" which would mean you need to calculate D2 and D3 yourself
Liked this a lot was easy to follow. Was trying this out on Hershey stock to see if its a buy using Gordon Growth since dividends have increased the past 15 years but end up with negative number? Dividend CAGR 20 y is .0952 & amount is 4.46. 4.46/(.08 - .0952) = -293.42 ?😂 Either Im doing it wrong or Hersheys is going under asap hahah
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Cheers mate. Explaining it better then my lecturers.
Haha I appreciate it!
this is the best explanation ive received. thanks from INDIA.
Thank you from the US!
Isn't Dsub1 the current dividend multiplied by (1+div growth rate)? D1 should be the NEXT div to pay. In short, it should have been $8 * 1.01 = $8.08. The final formula would have been the $8.08/ (.08-.01). The intrinsic value using that formula would have been $115.43.
This is normally correct but I imagine for the sake of simplicity he slapped it as div1 but yeah div0*1.08=div1
TY! this was wayyy clearer than how my professor tried to explain it
Haha I appreciate the feedback!
crisp and concise. Thanks
Glad it was helpful!
Great explanation. You are a life saver.
My pleasure! Thanks for the feedback
Thank you sir for such wonderful video and explanation.
It is my pleasure!
Buffett views retained earnings as the same or better than a dividend (no taxes for reinvested earnings), and has an equity bond theory that that accumulated value of “owner earnings” belongs to the investor…. by discounting the sum of all future owner earnings back to today in a similar manner, you can value a stock that doesn’t pay a dividend. Some people make the mistake of thinking equity bond is the initial 1/PE or E/P yield, but that isn’t how Buffett looks at it. I don’t know how bonds work or how Buffett values a bond, and I think Buffett is starting with that initial framework to build his equity bond theory but he has mentioned coupon rates and Mary Buffett has a few different books where she explains it a bit.
Why do we add the $100 at year 4? Is it because we expect to sell the stock again after those 4 years?
Correct! The $100 is the cashflow that we expect to receive from selling the stock 4 years from now. We expect the stock price to be $100 and we will sell the stock at that time
I was also looking for the answer for the same question😅😅
when using the Gordon Growth Model, what if g > r?
Good question! In the Gordon Growth Model, if the growth rate (g) is greater than the required return (r), the model will not hold, as it will predict a negative stock price, which is not realistic. This scenario typically suggests an overvaluation, unrealistic growth expectations, or too low of a required return.
Can this formula assume the dividend is indefinitely?
You can find your answer to this question here!
@3:42 - Gordon Growth Model/Constant Growth DDM
Thank you Teacher
You are welcome Neal
I think the PV is $103.07 not 103.47. Maybe I’m wrong?
You should do a problem where there is a period of high growth/low growth and constant growth thereafter. Kind of ties the Gordon model with a typical problem
Good idea, I can look into this topic in the future
Thank you 🙏
My pleasure!
Super clear explanation thank u!
Glad it was helpful!
can you explain why in gordon model we minus growth rate from the rate of return ???
Because R is risk associated with a stock and g is growth rate associated with the stock. So you minus the risk from the growth rate which is positive to a stock to obtain less risk since potential growth reduces overrall risk in a firm. Hope it helps. Thats the best way i can explain
Please make video on how to start preparation for CFA LEVEL 1 for 2024 and also on "Will A.I overtake the CFA's jobs in future?"
Those are 2 very good and broadly appealing video topics that I will look into
@@RyanOConnellCFA Thank you
@@Gaurav_Shrivastav Thank you for the suggestions!
How did you get 103.47? 7.41+8.57+4.76+82.32 = 103.06
Good catch, that is just a summing error on my part. The rest of the logic in the video is right but I should have written 103.06
@@RyanOConnellCFAisn’t that below 8%? I’m just confused on that
Please make video on multistage growth model
great , but how do you use this information , this model basically tells you if the company is profiting or not . Is that its sole purpose?
It tells you if the company is correctly valued. If the Intrinsic value is higher than its current stock price, then the stock is undervalued and is selling for less than its actually worth so you should buy more of it.
Thanks so much for the explanation
You're welcome!
I have one question. Why is D1 = $8? Why is it not D1= 8(1+0.01)? Great video❤️
D1 has already been grown. Remember D1=Do(1+g)
What if D2,D3, etc. is not given?
It depends on the way the question was phrased in that case. They may say, "the dividend will grow by 3% each of the next 2 years" which would mean you need to calculate D2 and D3 yourself
Thank you
My pleasure!
Great Video, thanks man
Glad you liked it! My pleasure
Best explanation ❤
thnks
My pleasure!
😊
yooo ty
My pleasure!
Liked this a lot was easy to follow. Was trying this out on Hershey stock to see if its a buy using Gordon Growth since dividends have increased the past 15 years but end up with negative number? Dividend CAGR 20 y is .0952 & amount is 4.46. 4.46/(.08 - .0952) = -293.42 ?😂 Either Im doing it wrong or Hersheys is going under asap hahah
But expected dividend payouts in forever in 100 years or more and payout every 3 months (not each year，） 😂
Say again.
thanks i love you
You're welcome!