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Chapter 9:
Cash flows for Stockholders
Multiyear Investor
Dividend Discount Model
(
w/o the P if you assume it
will be held forever)
Constant Dividend Growth
Two Stages Growth
Initial growth period, where stock grows at g
1
for t years.
After t years the stock grows at g
2
in perpetuity
Total Return
(w
/ continuous growth)
Growth = Return on New Investment x Retention Ratio
Retention Ratio = 1 Dividend Payout Ratio
Sustainable Growth
This is the maximum rate at which a company can grow without issuing equity, and without increasing its financial leverage.
Sustainable growth rate
1
= ROE x (1 dividend payout ratio) = ROE x retention ratio
Discounted Free Cash Flow Model
Enterprise Value (EV) = MV of equity + Debt – Cash
Free Cash Flow (FCF) = EBIT *(1Tax Rate) + Depreciation – Increase in Net Working Capital – Capex
Discounting the FCF by the weighted average cost of capital (WACC) gives the enterprise value.
Theoretical forward PE ratio
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 Spring '10
 mucklow
 Finance

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