24Lecture24

# Expected growth rate of 10 20 x 50 value per share

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

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: t equity risk premium was 5%. E ( ri ) = rf + β [ E ( rm ) − rf ] E (rPG ) = 3.5% + 0.9 [5%] = 8.0% Equities I: R. J. Hawkins Econ 136: Financial Economics 17/ 21 Two-Stage DDM Example: Proctor & Gamble (NYSE: PG) 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 Earnings 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 18/ 21 Two-Stage DDM Example: Proctor & Gamble (NYSE: PG) Stable Growth Stage (Damodaran, 2012) Assume the following after the next 5 years: Expected ROE of 12% per year (down from 20%). Expected payout ratio of 75% (up from 50%). Expected growth rate of 3% (= 12% x (1 - 0.75)). β moves up to 1.0 ⇒ E (rPG ) = 3.5% + 1.0 [5%] = 8.5%. Value per share during stable-growth stage: EPS5 × Payout Ratios r s − gs \$6.15 × 0.75 × 1.03 = 0.085 − 0.03 = \$86.38 Value per share at end of year 5 = Equities...
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 Berkeley.

Ask a homework question - tutors are online