The following screen provides a breakdown of the valuation model into its pieces.

First in this current example time 0 = 2009 and we define the intrinsic value of IBM as the PV of future residual earnings.  The time line for the IBM example is: 

1 = 2010, 2 = 2011, 3 = 2012, 4 = 2013, 5 = 2014.

In the following screen the calculations are broken down into their spreadsheet form.   You can verify the numbers (within rounding) using Excel.

Interpretation of the rows above:

DPS = Dividend per Share.  For 2010 2.4030 = 8.49 * 0.283 = 2010 projected residual earnings times the dividend payout ratio

CEPS = Comprehensive Income per share for each year, 2010, 2011, 2012 …..  In the above screen the CEPS for 2009 = 7.543.  Recall the assumed growth behavior was as follows:

Note:  The above convention is consistent with typical textbook presentations where the 5-year growth forecast is applied over years 3-5.  However, a variation that you can use is to compute the implied growth forecasts for years 3-5 from the 1-year, 2-year and 5-year forecasts.  This is computed as follows:

Computing Implied forecast for years 3-5:

Recall for 2010 IBM’s growth was forecast to be 0.125, for 2011 this is 0.094 and for the next 5-years 0.1043.  As a result, the annual growth forecasts for 2012, 2013, 2014 is implied from the above three numbers. 

If you prefer to use this internally consistent number then change the Stage 1 growth phase number to 0.1007 (for Stage 1 growth because the stage 1 growth is applied to years 3-5 in this model only because you have direct estimates for CEPS1 and CEPS2 i.e., years 1 and 2).  If you did this, the calculation details would appear as:

This is a refinement that uses an internally consistent set of Growth Forecasts.  This can be contrasted with the initial set of numbers (see below which reveals intrinsic value initial estimate = $205 versus $203).  Such a refinement makes a small difference to the projected intrinsic value, which may explain why many ignore this and just work directly with the 5-year growth forecast left.

So we will work with the original abnormal growth number: