Theexpecteddividends(andstockbuybacks)ontheindexfor
the next five years can be estimated from the current
dividends and expected growth of 8.5%.
The present value is computed by discounting back the
dividends at 8.22%. To estimate the terminal value, we
estimate modified dividends in year 6 on the index:
The value of the index can now be computed:
Value of index = Present value of dividends during high
growth+Presentvalueofterminalvalue=$35.24+35.33+
35.42+$35.51 + $35.60 + $927.63 = $1,104.73
Baseduponthisanalysis,wewouldhaveconcludedthatthe
index was overvalued by about 10% at 1,211.92.
FCFE (POTENTIAL DIVIDEND) DISCOUNT MODELS
Thefreecashflowtoequity(FCFE)modeldoesnotrepresent
a radical departure from the traditional dividend discount