FIN301 • Chapter 8 — Stock Valuation Spring 2026

Dividend payout and valuation • Dividend Growth Model (Gordon Growth) • CAPM required return • Practice & homework

Back to Course Hub: FIN301 Course Hub

Theme:

Slides, quiz, and key tools

Use the calculator for quick checks, then show your setup on paper (timeline + formulas).

Chapter 8 PPT Chapter 8 Quiz DGM Calculator (jufinance) jufinance.com

Key model: P0 = D1 / (r − g) where D1 = D0(1+g)

Part I — Dividend payout and stock valuation

Examples of dividend growth behavior across firms (steady growers vs. reinvestment firms).

Dividend growers: 30+ years of consecutive increases (table)

Use these as “best fit” firms for constant-growth DGM intuition.

Company	Ticker	Sector	Beta	Quarterly Div.	Annual Div.	Years ↑	Recent Increase
Johnson & Johnson	JNJ	Health Care	0.56	$1.24	$4.96	62	4.2% (2024)
Coca-Cola	KO	Consumer Staples	0.59	$0.51	$2.04	63	5.2% (2025)
Procter & Gamble	PG	Consumer Staples	0.42	$1.01	$4.03	68	7% (2024)
PepsiCo	PEP	Consumer Staples	0.55	$1.36	$5.42	51	7% (2025)
3M	MMM	Industrials	0.95	$1.51	$6.04	65	0.7% (2024)
Lowe’s	LOW	Consumer Discretionary	1.09	$1.15	$4.60	60	5% (2024)
Colgate-Palmolive	CL	Consumer Staples	0.60	$0.50	$2.00	62	4.2% (2024)
Hormel Foods	HRL	Consumer Staples	0.41	$0.29	$1.16	59	2.7% (2025)
Illinois Tool Works	ITW	Industrials	1.12	$1.50	$6.00	50+	7% (2024)
AbbVie	ABBV	Health Care	0.56	$1.64	$6.56	10	5.8% (2025)

Near-fixed dividend growth examples (table + links)

Company	Ticker	Sector	Quarterly Div.	Annual Div.	Recent Increase (%)	Dividend Yield (%)	Dividend History
Microsoft	MSFT	Technology	0.83	3.32	10	0.92	Link
Visa	V	Financial Services	0.59	2.36	13	0.76	Link
McDonald's	MCD	Consumer Discretionary	1.77	7.08	6	2.31	Link
PepsiCo	PEP	Consumer Staples	1.355	5.42	5	3.93	Link
Waste Management	WM	Industrials	0.825	3.3	10	1.56	Link

Firms that do not pay dividends (reinvestment logic)

Key idea: some firms retain cash to fund growth (R&D, logistics, platforms, acquisitions). For these firms, DDM is usually not appropriate.

Company	Ticker	Sector	Beta	Dividend (10y)	Reason	Quick note
Amazon	AMZN	Consumer Discretionary	1.39	No	Reinvests in logistics, AWS, growth	Buy for long-term growth
Alphabet (Google)	GOOGL	Communication Services	1.06	No	Reinvests in AI, cloud, YouTube, search	AI/cloud exposure
Meta Platforms	META	Communication Services	1.21	No	Innovation + reinvestment	Volatility risk
Tesla	TSLA	Consumer Discretionary	2.19	No	Production, R&D, expansion	High risk
Berkshire Hathaway	BRK.A / BRK.B	Financials	0.92	No	Reinvestment philosophy	Compounding
Netflix	NFLX	Communication Services	1.26	No	Content and expansion	Streaming growth
Shopify	SHOP	Technology	1.87	No	Platform reinvestment	Aggressive tech
Uber	UBER	Technology	1.58	No	Mobility reinvestment	Mobility/AI
Roku	ROKU	Communication Services	1.83	No	Platform/content deals	Speculative
Palantir	PLTR	Technology	2.05	No	AI/data platforms	Defense/AI
Snowflake	SNOW	Technology	0.90	No	Cloud scaling	No dividends
Twilio	TWLO	Technology	1.41	No	Enterprise tools	Profitability path

Dividend Growth Model (DGM) — Gordon Growth

P0 = D1 / (r − g)

D1 = D0(1+g) | r = required return | g = dividend growth rate

What it is / when to use it

Values a stock assuming dividends grow at a constant rate forever.
Best for mature firms with stable dividend growth (e.g., KO, PG, JNJ, PEP).
Often used to check if a stock is over/under-valued relative to intrinsic value.

Limitations (important)

Constant growth assumption is not realistic for many firms.
Very sensitive to inputs: small error in r or g can change valuation a lot.
Does not work for firms that do not pay dividends.

If no dividends: alternative valuation methods

Model	Good For
Discounted Cash Flow (DCF)	Growth firms with reinvested profits
Price/Earnings (P/E)	Firms with positive earnings, no dividends
EV/EBITDA	Comparing firms in the same industry
Price/Sales	Early-stage or fast-growing firms

Useful identities (problem solving)

r = D1/P0 + g (total return = dividend yield + capital gain yield)
g = (P1 − P0)/P0 and P1 = D2/(r − g)
D1=D0(1+g), D2=D1(1+g), D3=D2(1+g), …

Class Exercise — Estimate JNJ’s stock price using DGM + CAPM

Objective: estimate intrinsic value using DGM and compare to the market price (closest estimate can win a prize/bonus point).

Step-by-step instructions (expand)

Inputs

D0: $4.76 (2023 full-year dividend)
g: 4.2% (recent annual increase)
β: 0.56
Rf: 4.2% (10-year Treasury yield, as of 2025)
Rm: 10.0% (long-run market average)

1) Required return via CAPM

r = Rf + β(Rm − Rf)

2) Next year dividend

D1 = D0(1+g)

3) Intrinsic value via DGM

P0 = D1/(r − g)

4) Compare to market price

Look up the current price of JNJ (Yahoo Finance / Google Finance).
Compare your DGM estimate to the market price.

Optional challenge questions

What happens if g increases?
What if β is higher?
Why might your DGM estimate differ from the market price?

Part II — Constant dividend growth model practice (links)

Calculate stock prices given dividend timelines and expected selling prices.

Practice problem images (expand)

Problem image 013
Image 015 + Image 017
Image 015 + Image 019 + Image 021
Image 015 + Image 019 + Image 023 + Image 025

Reference reading (external): calculatinginvestor.com

Homework — Chapter 8 (due with final)

Homework questions + answers (expand)

Northern Gas: D0=2.80, g=3.8%, P0=26.91 → market rate of return? (14.6%)
Douglass Gardens: g=4.1%, r=12.6%, P0=24.90 → next dividend? (2.12)
IBM: D0=3.00, g=10% → next dividend D1? (3.3)
HPD: buy $20 (May 2018), sell $30 (May 2019) → holding period return? (50%)
P0=50, D1=2, g=6% → expected return r? (10%)
r=8%, D1=2, g=4% → price P0? (50)
r=8%, D1=2, g=4% → dividend in 3 years D3? (2.16)
D0=5, g=7%, P0=42.80 → required return r? (19.5%)
r=15%, D0=6, g=6% → expected price P0? (70.67)
r=12.6%, g=6% → dividend yield? (6.6%)

Reminder: For constant-growth DGM, make sure r > g. If not, the model breaks.