82 and dividends 191 use capm for cost of equity

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Unformatted text preview: A forward GGM high growth phase ￿ ￿￿￿ ￿ ￿T ￿ h D0 (1 + gh ) 1 − 1+gh 1+r r h − gh Equities I: R. J. Hawkins + ￿ D0 stable growth state ￿ 1+gh 1+rh ￿￿ ￿T PRs 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...
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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.

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