dcfgrowt - Estimating Growth Aswath Damodaran Aswath...

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Aswath Damodaran 1 Estimating Growth Aswath Damodaran
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Aswath Damodaran 2 Ways of Estimating Growth in Earnings n Look at the past The historical growth in earnings per share is usually a good starting point for growth estimation n Look at what others are estimating Analysts estimate growth in earnings per share for many firms. It is useful to know what their estimates are. n Look at fundamentals Ultimately, all growth in earnings can be traced to two fundamentals - how much the firm is investing in new projects, and what returns these projects are making for the firm.
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Aswath Damodaran 3 I. Historical Growth in EPS n Historical growth rates can be estimated in a number of different ways Arithmetic versus Geometric Averages Simple versus Regression Models n Historical growth rates can be sensitive to the period used in the estimation n In using historical growth rates, the following factors have to be considered how to deal with negative earnings the effect of changing size
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Aswath Damodaran 4 Motorola: Arithmetic versus Geometric Growth Rates Revenues % Change EBITDA % Change EBIT % Change 1994 22,245 $ 4,151 $ 2,604 $ 1995 27,037 $ 21.54% 4,850 $ 16.84% 2,931 $ 12.56% 1996 27,973 $ 3.46% 4,268 $ -12.00% 1,960 $ -33.13% 1997 29,794 $ 6.51% 4,276 $ 0.19% 1,947 $ -0.66% 1998 29,398 $ -1.33% 3,019 $ -29.40% 822 $ -57.78% 1999 30,931 $ 5.21% 5,398 $ 78.80% 3,216 $ 291.24% Arithmetic Average 7.08% 10.89% 42.45% Geometric Average 6.82% 5.39% 4.31% Standard deviation 8.61% 41.56% 141.78%
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Aswath Damodaran 5 Cisco: Linear and Log-Linear Models for Growth Year EPS ln(EPS) 1991 $ 0.01 -4.6052 1992 $ 0.02 -3.9120 1993 $ 0.04 -3.2189 1994 $ 0.07 -2.6593 1995 $ 0.08 -2.5257 1996 $ 0.16 -1.8326 1997 $ 0.18 -1.7148 1998 $ 0.25 -1.3863 1999 $ 0.32 -1.1394 n EPS = -.066 + 0.0383 ( t): EPS grows by $0.0383 a year Growth Rate = $0.0383/$0.13 = 30.5% ($0.13: Average EPS from 91-99) n ln(EPS) = -4.66 + 0.4212 (t): Growth rate approximately 42.12%
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Aswath Damodaran 6 A Test n You are trying to estimate the growth rate in earnings per share at Time Warner from 1996 to 1997. In 1996, the earnings per share was a deficit of $0.05. In 1997, the expected earnings per share is $ 0.25. What is the growth rate? o -600% o +600% o +120% o Cannot be estimated
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7 Dealing with Negative Earnings n When the earnings in the starting period are negative, the growth rate cannot be estimated. (0.30/-0.05 = -600%) n There are three solutions: Use the higher of the two numbers as the denominator (0.30/0.25 = 120%) Use the absolute value of earnings in the starting period as the denominator (0.30/0.05=600%) Use a linear regression model and divide the coefficient by the average earnings. n
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This note was uploaded on 01/29/2012 for the course FIN 6000 taught by Professor Banko during the Fall '11 term at University of Florida.

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dcfgrowt - Estimating Growth Aswath Damodaran Aswath...

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