wk 4 - Estimating Growth and Terminal Value_2011s2

Fins3641 sav week 4 estimating growth and terminal

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FINS3641 SAV Week 4: Estimating Growth and Terminal Value 21 iv) It is prudent to set the stable growth rate close to (and not exceeding) the growth rate of the economy Stable growth firms should earn close to 0 excess returns, i.e., ROE k e & ROC k c . Changes in stable growth may not have any impact on firm value as the firm will need to a higher reinvestment rate to sustain the higher growth: FCFF: TV n = ࡱ࡮ࡵࢀ ࢔శ૚ ૚ି࢚ࢇ࢞ ࢘ࢇ࢚ࢋ ሻሺ ૚ିࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋ ࡯࢕࢙࢚ ࢕ࢌ ࡯ࢇ࢖࢏࢚ࢇ࢒ – ࡿ࢚ࢇ࢈࢒ࢋ ࢍ࢘࢕࢚࢝ࢎ ࢘ࢇ࢚ࢋ = ࡱ࡮ࡵࢀ ࢔శ૚ ૚ି࢚ࢇ࢞ ࢘ࢇ࢚ࢋ ሻሺ ૚ିࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋ ࡯࢕࢙࢚ ࢕ࢌ ࡯ࢇ࢖࢏࢚ࢇ࢒ – ࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋൈࡾࡻ࡯ = ࡱ࡮ࡵࢀ ࢔శ૚ ૚ି࢚ࢇ࢞ ࢘ࢇ࢚ࢋ ሻሺ ૚ିࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋ ࡯࢕࢙࢚ ࢕ࢌ ࡯ࢇ࢖࢏࢚ࢇ࢒ – ࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋൈ࡯࢕࢙࢚ ࢕ࢌ ࡯ࢇ࢖࢏࢚ࢇ࢒ = ࡱ࡮ࡵࢀ ࢔శ૚ ૚ି࢚ࢇ࢞ ࢘ࢇ࢚ࢋ ሻሺ ૚ିࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋ ࡯࢕࢙࢚ ࢕ࢌ ࡯ࢇ࢖࢏࢚ࢇ࢒ ૚ି ࢉࢇ࢖࢏࢚ࢇ࢒ ࢘ࢋ࢏࢔࢜ࢋ࢙࢚࢓ࢋ࢔࢚ ࢘ࢇ࢚ࢋ However if the firm’s ROE > (<) ke or ROC > (<) kc. the terminal value will increase (decrease) as the growth rate increases.
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