The basic equation for growth is g b roe where g

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Unformatted text preview: ies I: R. J. Hawkins Econ 136: Financial Economics 3/ 21 Earnings and Dividend Growth Fundamental Analysis Growth:“The sustainable growth rate is the rate of earnings and dividend growth that can be sustained for a given level of return on equity, keeping the capital structure constant over time and without issuing additional common stock.” The basic equation for growth is g = b × ROE where g ≡ sustainable growth rate b ≡ earnings retention ratio = (1 - dividend payout ratio) ROE ≡ return on equity Equities I: R. J. Hawkins Econ 136: Financial Economics 6/ 21 Gordon Growth Model Example: Con Ed Consolidated Edison (NYSE: 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 (rED ) = 3.5% + 0.8 [5%] = 7.5% Equitie...
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