DJIA VALUATION EXERCISE
http://www2.bc.edu/~irelandp/ec261.html
Dividends and Dividend Growth Rates: DJIA
Year Dividends Paid
2003 211.87
1993 99.66 10-yr annualized growth rate, 1993-2003 7.83
1983 56.30 20-yr annualized growth rate, 1983-2003 6.85
1973 35.30 30-yr annualized growth rate, 1973-2003 6.16
1963 23.40 40-yr annualized growth rate, 1963-2003 5.66
1953 16.10 50-yr annualized growth rate, 1953-2003 5.29
1943 6.30 60-yr annualized growth rate, 1943-2003 6.03
1933 3.40 70-yr annualized growth rate, 1933-2003 6.08
1923 4.50 80-yr annualized growth rate, 1923-2003 4.93
Bond Rates, December 2003
10-yr US Treasury Note 4.27
Moody's Aaa 5.62
Moody's Baa 6.60
"Benchmark Valuation" Using the Gordon Growth Model P = ((1+g)/(k-g))*D
g = growth rate of dividends; k = required return on equity
D = today's level of dividends; P = predicted level of DJIA
g k D P
0.065 0.085 211.87 11282.08
"Risks to the Forecast"
Higher Required Return on Equity 0.065 0.090 211.87 9025.66
Lower Growth Rate of Dividends 0.060 0.085 211.87 8983.29
TRY IT YOURSELF!
1) Replace the values of g and k in the table below with the values that you prefer.
2) Let Excel calculate the value of P implied by the Gordon Growth Model
0.060 0.085 211.87 8983.29