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Unformatted text preview: ies I: R. J. Hawkins Econ 136: Financial Economics 3/ 21 Earnings and Dividend Growth
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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- Fall '08