Why Do I Get A Negative Value When I Try To Value This Stock?
Tuesday, July 13th, 2010 at
5:15 am
I’m using the following parameters:
Risk free return: .48%
Market return: 8.5%
Beta: .70
D1: 2.16
Plowback ratio: 78%
ROE: 58%
I’m trying to use a basic DDM formula D1 / K-G but I keep getting a negative value.
Tagged with: Negative • Stock • This • Value • When
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It looks like you’re getting an extremely high growth rate, based on the ROE of 58%. If growth rate is greater than required return, then of course you’re going to end up with a negative value.
DDM formula is meant to be used for long-term sustainable growth. It’s hard to believe that the ROE of 58% can be sustained for the indefinite future. If the figure is correct, I think you might have to use another model, like a multi-stage dividend growth model.