Let's move on to a more versatile valuation model, one that can determine the worth of a growing rates. You can download this Excel file called modified dm under the course content below this lecture. If for some reason you cannot access the Excel file, do email me at this address and I will send you a copy. It's important for you to have this Excel model so that you can practice with it during your free time. Now, when you open the Excel file, you will see something like this three dividend discount models neatly done up for you. bring your attention to DDM version three.
This is the only version that I want you to focus on. The rest of the versions can easily be understood once you understand how to use version three. In addition, the orange cells that you see are for you to input your data unless you are an expert in Excel financial modeling Do not touch the rest of the blue cells as they have formulas written in them. With that said, let's apply the DDM version three to a hypothetical hotel read example, let's call this greet, and hotel trust. The background story of em hotel trust is that the trust was listed on the New York Stock Exchange at the end of FDI 2011 and has concrete plans in place to expand in the next two years. You did your research and found their dpu track record to be as follows.
Proceed to calculate the average GPU by adding up all the numbers in the table and divide it by five which turns out to be $1 42 cents. type this amount into the average dividend per share, sell over here. Now turn your attention to the growth And discount rate cells. Remember, we must not forget that M hotel Trust has plans to expand. Hence, we need to account for these two years of potential growth. But what growth rate should you attribute to M hotel trust?
It depends once again on the depth of your research and understanding about this read the details of the growth plan where is m hotel trust expanding into how many hotels they are planning to acquire and so forth. Of course, the easiest way to determine the growth rate is to use the reeds historic numbers, calculate the difference between each year and average them out, which is what I did. You'll find the growth rate between 2014 to 2015 to be 7.7%. And the growth rate from 2015 to 2016. To be 7.1%. Get the average of the two growth rates and presto 7.4% is the average growth rate.
But before you plug in the 7.4% you have to ask yourself, Is this 7.4% growth rate logical? What were the reasons behind this growth rate between FYI 2014 to FYI 2016 how many new hotels does the roof plan to buy in? FYI, 2018 to FYI, 2019. If 7.4% comes across as slightly too high, then round it down to 7%. The point here is to be conservative yet logical. Let's go ahead and plug 7% into FYI, 2018.
And FYI, 2019. Now for the rest of the years from FYI, 2020 to 2026. Look at this portion of the model. A conservative investor might Just assume a zero percent growth rate for the rest of the years. This is perfectly fine, really, because valuation also depends on what makes sense to you just as long as it is reasonable and conservative. Answer myself, what makes a reasonable and conservative rate would be the average 10 year growth rate in the US hospitality industry.
If I can't obtain this figure, the alternative would be to look at the general US economic growth rate for the past 10 years, which is 3.12%. So I plug in 3.12% for FYI, 2022 FYI, 2026. As for the discount rate, follow how I derive it here with the two RV method, adjust the discount rate according to what you should be reasonably compensated for. So for example, if m hotel Trust, it's expanding overseas into more exotic countries for the upcoming two years, then the discount rate should be higher, as you can see from the model. Once you plug in all the numbers, press enter, and voila. The intrinsic value for em hotel trust appears, and it is $12 49 cents per share.
Note that this DDM model is inherently conservative because it assumes the reads will stop paying dividends after the 10th year. Let's say that if the stock market prices and hotel trust 5% to 10% below $12 49 cents, there is a strong reason for me to buy. Otherwise, I will have to keep track of it and wait for a downturn to buy this route. So do try out this model on a route that appeals to you. On a side note, if you are planning to buy a commercial real estate have negative views for the next two years on Office rental rates. You can input negative percentage numbers into the growth rate cells for FYI, 2018.
And FYI, 2019. The model is dynamic. Alright, let's move on to the last valuation model. Thank you for listening