Expected Growth Rate

Expected Growth Rate - Expected Growth Rate • Estimating...

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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 11-1 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 11-2 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 11-3 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 Log-linear regression models 11All three use time-series 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 11-5 The Internet Investments Online • http://www.leadfusion.com • http://www.lamesko.com/FinCalc • http://www.numeraire.com • http://www.moneychimp.com 11-6 ...
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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.

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Expected Growth Rate - Expected Growth Rate • Estimating...

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