21Lecture21-revised

Regulatory authorities restrict price increases to

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 11 (Damodaran, 2012) Background: Population and power usage have leveled off. Regulatory authorities restrict price increases to about the inflation rate. Stable funding for decades. Customers like dividends and Con Ed pays as much as possible. Equities I: R. J. Hawkins Econ 136: Financial Economics 8/ 20 Gordon Growth Model Example: Con Ed Consolidated Edison (Con Ed) in May 2011 (Damodaran, 2012) Background Information from 2010 Earnings per share were $3.47. Dividends per share were $2.22. The β of Con Ed was 0.80. Use CAPM for cost of equity capital The risk-free rate was 3.5% The β for Con Ed was 0.8. The market equity risk premium was 5%. E ( ri ) = rf + β [ E ( rm ) − rf ] E (rCon Ed ) = 3.5% + 0.8 [5%] = 7.5% Equities I: R. J. Hawkins Econ 136: Financial Economics 9/ 20 Gordon Growth Model Example: Con Ed Consolidated Edison (Con Ed) in May 2011 (Damodaran, 2012) Assume the following in perpetuity An expected ROE of 9.79%. An expected payout ratio of 64% (= $2.22 / $3.47 ) An expected retention rate of 36% (= 1 - 0.64). An expected growth rate of 3.52% (= 0....
View Full Document

Ask a homework question - tutors are online