Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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In November 2005, ExxonMobil had the largest market
capitalizationofanycompanyintheworld.Withthesurgein
cash flowsgeneratedbyrising oilpricesovertheprevious
fouryears,ExxonMobilhadaugmenteddividendswithstock
buybacks each year. The following table summarizes the
dividendsandbuybacksbetween 2001 and 2004 (inmillions
of dollars).


Over the four-year period, the conventional payout ratio
averaged only 35.16% but the modified payout ratio was
70.95%;themodifiedretentionratioisonly29.05%.Wecan
estimatetheexpectedgrowthinearningsforExxonMobilin
thelongtermbytakingtheproductofthismodifiedretention
ratioandthereturnonequityof15%thatweprojectforthe
future.


Toestimatethecostofequity,weassumethatExxonMobil
hasa betaof0.8and thattherisk-freerateof 4.5%anda
market risk premium of 4% apply:


Wecanvalue ExxonMobilusing astable growth dividend
discount model, but using the modified dividends per share:

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