This preview shows page 1. Sign up to view the full content.
Unformatted text preview: A forward GGM high growth phase
D0 (1 + gh ) 1 − 1+gh
r h − gh Equities I: R. J. Hawkins + D0 stable growth state 1+gh
PRh (1 + gs ) r s − gs Econ 136: Financial Economics 15/ 20 Two-Stage DDM Example: Proctor & Gamble (P&G)
High Growth Stage (Damodaran, 2012) Background Information
P&G reported earnings of $12.736 B in earnings for 2010.
Paid out 49.74% of these earnings as dividends.
On a per share basis: earnings = $3.82 and dividends = $1.91.
Use CAPM for cost of equity capital
The risk-free rate was 3.50%.
The β for P&G was 0.9.
The market equity risk premium was 5%.
E ( ri ) = rf + β [ E ( rm ) − rf ] E (rP&G ) = 3.5% + 0.9 [5%] = 8.0% Equities I: R. J. Hawkins Econ 136: Financial Economics 16/ 20 Two-Stage DDM Example: Proctor & Gamble (P&G)
High Growth Stage (Damodaran, 2012) Assume the following for the next 5 years
Expected ROE of 20% per year.
Expected retention ratio of 50%.
Expected growth rate of 10% (= 20% x 50%).
Value per share during high-growth phase Earn...
View Full Document
This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.
- Fall '08