21Lecture21-revised

# Expected growth rate of 3 20 x 50 expected payout

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Unformatted text preview: ings per share Payout ratio Dividends per share Cost of equity Present value 1 \$4.20 50.0% \$2.10 8.0% \$1.95 2 \$4.62 50.0% \$2.31 8.0% \$1.98 Year 3 \$5.08 50.0% \$2.54 8.0% \$2.02 4 \$5.59 50.0% \$2.80 8.0% \$2.06 5 \$6.15 50.0% \$3.08 8.0% \$2.09 Present value of all dividends = \$10.09 Equities I: R. J. Hawkins Econ 136: Financial Economics 17/ 20 Two-Stage DDM Example: Proctor &amp; Gamble (P&amp;G) Stable Growth Stage (Damodaran, 2012) Assume the following after the next 5 years: Expected ROE of 12% per year (down from 20%). Expected growth rate of 3% (= 20% x 50%). Expected payout ratio of 75% (up from 50%). β moves up to 1.0 ⇒ E (rP&amp;G ) = 3.5% + 1.0 [5%] = 8.5%. Value per share during stable-growth stage: EPS5 × Payout Ratios rs − gs \$6.15 × 0.75 × 1.03 = 0.085 − 0.03 = \$86.41 Value per share at end of year 5 = Equities I: R. J. Hawkins Econ 136: Financial Economics 18/ 20 Two-Stage DDM Example: Proctor &amp; Gamble (P&amp;G) (Damodaran, 2012) Bringing it all together: The PV during the high-growth stage is \$10.09. The value per share at the myemr end or year 5 is \$86.41 Need to discount this at 8.0% cost of equity for high-growth phase. The value per share is V = \$10.09 + \$86.41 = \$68.90 1.085 The stock was trading near \$68 in May of 2011. The stock is fairly valued. Equities I: R. J. Hawkins Econ 136: Financial Economics 19/ 20 Two-Stage DDM Example: Proctor &amp; Gamble (P&amp;G) (Damodaran, 2012) All on one go: V0 = ￿ high growth phase ￿ ￿￿￿ ￿ ￿T ￿ h D0 (1 + gh ) 1 − 1+gh 1+r rh − gh + ￿ D0 stable growth state ￿ 1+gh 1+rh ￿￿ ￿T PRs PRh ￿ (1 + gs ) r s − gs D0 = \$1.91, gh = 0.10, rh = 0.08, gs = 0.03, and rs = 0.085. V0 = ￿ ￿ 1 ￿5 ￿ \$1.91 (1.1) 1 − 11..08 0.08 − 0.10 + \$1.92 ￿ ￿ 1.1 5 0.75 1.08 0 .5 (1.03) 0.085 − 0.03 = \$10.09 + \$58.81 = \$68.90 Equities I: R. J. Hawkins Econ 136: Financial Economics 20/ 20...
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