## Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

NVIDIA Corp., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 15.03%
0 DPS01 0.16
1 DPS1 0.21 = 0.16 × (1 + 28.48%) 0.18
2 DPS2 0.26 = 0.21 × (1 + 25.10%) 0.19
3 DPS3 0.31 = 0.26 × (1 + 21.71%) 0.21
4 DPS4 0.37 = 0.31 × (1 + 18.33%) 0.21
5 DPS5 0.43 = 0.37 × (1 + 14.95%) 0.21
5 Terminal value (TV5) 603.67 = 0.43 × (1 + 14.95%) ÷ (15.03%14.95%) 299.78
Intrinsic value of NVIDIA Corp.’s common stock (per share) \$300.79
Current share price \$226.88

Based on: 10-K (filing date: 2021-02-26).

1 DPS0 = Sum of the last year dividends per share of NVIDIA Corp.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.79% Expected rate of return on market portfolio2 E(RM) 11.68% Systematic risk of NVIDIA Corp.’s common stock βNVDA 1.34 Required rate of return on NVIDIA Corp.’s common stock3 rNVDA 15.03%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rNVDA = RF + βNVDA [E(RM) – RF]
= 1.79% + 1.34 [11.68%1.79%]
= 15.03%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

NVIDIA Corp., PRAT model

Average Jan 31, 2021 Jan 26, 2020 Jan 27, 2019 Jan 28, 2018 Jan 29, 2017 Jan 31, 2016
Selected Financial Data (US\$ in millions)
Cash dividends declared and paid 395  390  371  341  261  213
Net income 4,332  2,796  4,141  3,047  1,666  614
Revenue 16,675  10,918  11,716  9,714  6,910  5,010
Total assets 28,791  17,315  13,292  11,241  9,841  7,370
Shareholders’ equity 16,893  12,204  9,342  7,471  5,762  4,469
Financial Ratios
Retention rate1 0.91 0.86 0.91 0.89 0.84 0.65
Profit margin2 25.98% 25.61% 35.34% 31.37% 24.11% 12.26%
Asset turnover3 0.58 0.63 0.88 0.86 0.70 0.68
Financial leverage4 1.70 1.42 1.42 1.50 1.71 1.65
Averages
Retention rate 0.88
Profit margin 28.48%
Asset turnover 0.72
Financial leverage 1.57

Dividend growth rate (g)5 28.48%

2021 Calculations

1 Retention rate = (Net income – Cash dividends declared and paid) ÷ Net income
= (4,332395) ÷ 4,332
= 0.91

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 4,332 ÷ 16,675
= 25.98%

3 Asset turnover = Revenue ÷ Total assets
= 16,675 ÷ 28,791
= 0.58

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 28,791 ÷ 16,893
= 1.70

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.88 × 28.48% × 0.72 × 1.57
= 28.48%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$226.88 × 15.03%\$0.16) ÷ (\$226.88 + \$0.16)
= 14.95%

where:
P0 = current price of share of NVIDIA Corp.’s common stock
D0 = the last year dividends per share of NVIDIA Corp.’s common stock
r = required rate of return on NVIDIA Corp.’s common stock

#### Dividend growth rate (g) forecast

NVIDIA Corp., H-model

Year Value gt
1 g1 28.48%
2 g2 25.10%
3 g3 21.71%
4 g4 18.33%
5 and thereafter g5 14.95%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 28.48% + (14.95%28.48%) × (2 – 1) ÷ (5 – 1)
= 25.10%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 28.48% + (14.95%28.48%) × (3 – 1) ÷ (5 – 1)
= 21.71%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 28.48% + (14.95%28.48%) × (4 – 1) ÷ (5 – 1)
= 18.33%

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