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Unformatted text preview: Expected Growth Rate
• Estimating Growth From Fundamentals
– Determined by
•
• – – the growth of earnings
the proportion of earnings paid in dividends In the short run, dividends can grow at a
different rate than earnings if the firm
changes its dividend payout ratio
Earnings growth is also affected by
earnings retention and equity return
111 Expected Growth Rate
• Breakdown of ROE
ROE=
= = Net Income
Sales
Total Assets
×
×
Common Equity
Sales
Total Assets Profit
Total Asset
Financial
Margin x Turnover x Leverage
112 Expected Growth Rate
• • • The first operating ratio, net profit margin,
indicates the firm’s profitability on sales
The second component, total asset
turnover is the indicator of operating
efficiency and reflect the asset and capital
requirements of business.
The final component measure financial
leverage. It indicates how management
has decided to finance the firm 113 Expected Growth Rate
• Estimating Growth Based on History
– – Historical growth rates of sales, earnings,
cash flow, and dividends
Three techniques
• • Linear regression models •
– Arithmetic or geometric average of annual
percentage changes Loglinear regression models 11All three use timeseries plot of data4 Estimating Dividend Growth
for Foreign Stocks
• • The underlying factors that determine the
growth rates for foreign stocks are similar
to those for U.S. stocks
The value of the equation’s components
may differ substantially due to differences
in accounting practices in different
countries
– Retention Rate – Net Profit Margin 115 The Internet Investments
Online
• http://www.leadfusion.com • http://www.lamesko.com/FinCalc • http://www.numeraire.com • http://www.moneychimp.com 116 ...
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.
 Spring '12
 DAVIDBRAY

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