EV2 DDM Valuation

One equity is valued by a dividend discount model. Earnings per share, dividends and the discount rate are released.

Objective

Value EQ from its dividends and the discount rate, and trade against the price. Assessed on profit and loss, with closing positions valued at the final value.

What it shows

• The dividend discount model: value as dividends discounted at a rate.
• A small change in the discount rate moving the value a lot.
• Three releases of the model's inputs, each a chance to revalue.

Watch out for

• Changing the dividend estimate and leaving the discount rate alone.
• A value that is very sensitive to inputs that are released a little at a time.
• The price moving before the student has finished the calculation.

Who takes part

• Trader — every student. Trades EQ, one equity, with 100,000 in cash.

Class size

Ten to forty students in one role. Students work the model themselves, so a class that can compare answers is the useful one.