INVESTMENT ANALYSIS – AREAS OF CONCENTRATION (TOPIC: (H-MODEL)

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Topic: HISA & Fuller’s Model (H – Model)

We going straight to calculation of this.

Here is the formula:  Sorry, the computer did not give me exactly want I want so I have to hand write it.

 

Were:

r=the weight of return or the expected rate of return

Do = current dividend per shares

Po= current market price

g3=Long run growth in dividend for the final phase

g1=growth rate in dividend for phase 1

H= A+B

       2

A = number of years in phase 1

B = the last year at the end of period 2

ILLUSTRATION:

Suppose that the M & M Corporation has just paid a dividend of N1.5k and the dividend is expected to grow at a rate of 20% in the first 5 years followed by 16% in the next 5 years and 10% indefinitely thereafter, if the current market price per share is N40, calculate the investor’s expected rate of return using the HISA AND FULLER’S MODEL OR H-MODEL.

SOLUTION:

Here is the formula again:

 

First let’s solve for H which is A+B

                                              2

H = 5+10

         2

H=   15

        2

H=7.5

r= 1.5  [(1+10%) + 7.5 (20% - 10%)] + 10%

     40 

r= 0.0375 (1.1) + (0.75) + 0.1

r= 0.0375 (1.85) + 0.1

r= 16.94%