429week03f07

429week03f07 - Week 3: Sep 10 • Equity Valuation – TVM...

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Unformatted text preview: Week 3: Sep 10 • Equity Valuation – TVM Approach Equity Valuation • TVM Approach – Gordon Growth Model – Plowback / Retention ratio: amount of earnings put back into firm • Earnings are split by the financial manager between dividends and plowback • Plowback contributes to future earning power – Assumption: Constant Returns to Scale -- returns are not effected by size of firm • Before, we considered growth of Cashflows; now we want to talk about growth of Dividends Equity Valuation – So we have, – Since we are talking about equity, we need to update our Gordon Growth Model ) ( * ) ( ) ( pb plowback r return g growth = pb r r Div P pb r g g r Div g r C P earnings retained firm earnings retained div div firm * *- = =- =- = Equity Valuation – Price has stable and growth components – PVGO is the growth component, Div/r is the value of the firm if it had no growth – Consider the impact of plowed back earnings • those earnings create some amt of new cashflows at the cost of depriving dividends today •...
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This note was uploaded on 04/06/2008 for the course H ADM 429 taught by Professor Cchang during the Fall '03 term at Cornell.

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429week03f07 - Week 3: Sep 10 • Equity Valuation – TVM...

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