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Formula sheet/NISM Series XV: Research Analyst/Valuation Principles
[ VALUATION PRINCIPLES ]

Dividend Discount Model (Gordon Growth Model)

P0=D1/(ke−g)=[D0×(1+g)]/(ke−g)P_{0} = D_{1} / (k_{e} - g) = [ D_{0} \times (1 + g) ] / (k_{e} - g)
Sustainable Growth Rate(g)=b×ROE=(1−Dividend Payout Ratio)×ROE\text{Sustainable Growth Rate} (g) = b \times ROE = (1 - \text{Dividend Payout Ratio}) \times ROE
Variables

D1D_{1}: Expected next year dividend; kek_{e}: Cost of equity; g: Constant growth rate (strictly kek_{e} > g). D0D_{0}: Most recent (current year) dividend; b: Retention ratio (1 - Dividend Payout Ratio).

Exam note

Best suited for mature, stable, high dividend-paying firms in defensive sectors.

Worked examples
Gordon Growth Dividend Discount Model (DDM)

Nestle India paid a dividend of Rs 120 per share last year (D_0). The dividend is expected to grow perpetually at a constant rate of 8% p.a. If the required rate of return on equity (k_e) is 12%, calculate the intrinsic value per share.

CAPM Cost of Equity and WACC Calculation

An analyst is estimating WACC for Titan Company. Data: 10-year G-Sec yield (R_f) = 7.0%, Expected Nifty 50 Return (R_m) = 14.0%, Titan Beta (β) = 1.25. Pre-tax Cost of Debt (k_d) = 8.5%, Corporate Tax Rate = 25%. Capital Structure: Equity = 80%, Debt = 20%. Calculate Cost of Equity (k_e) and WACC.

Peter Lynch PEG Ratio & Peer Comparison

Stock A trades at P/E 24x with projected EPS growth of 20% p.a. Stock B trades at P/E 16x with projected EPS growth of 10% p.a. Calculate PEG ratios and determine which stock offers better value.