Chapter 4
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adivacollegeChapter 4
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adivacollegeLecture 4: Common Stocks
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_ P
_ D
_ r
∞
Dt
P0 = ∑
t =1 (1 + rt )t
Dt +1 = (1 + g)Dt
r
∞
Dt D1
P0 = ∑ =
t =1 (1 + rt ) r−g
t
D1 1+ g
P0 == = D0
r−g r−g
1.06
P0 == = $7.57
0.2 − 0.06
D1 (1 + g)D0
r= +g= +g
P0 P0
r − D0 / P0
g=
1 + D0 / P0
P0 = (38.5 + 38.125) / 2 = 38.3125
D0 / P0 = 1.32 / 38.3125 = 0.03445
0.12 − 0.03445
g= = 8.27%
1.03445
D1 D2 Dt 1 Dt +1
P0 = + + ... + +
1 + r (1 + r) 2
(1 + r) (1 + r)t r − gsteady
t
$1.06 $1.06 2 $1.06 3 1 $1.06 4
P0 = + + + = $6.41
1.2 (1.2) 2
(1.2) 3
(1.2) 0.2 − 0.02
3
Notice: more than 60% of the firm value is due to the steady state growth.
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E $1
P0 = = = $10
r 0.1
g = ROE b = 0.10 0.8 = 0.08
D1 = EPS1 p = 0.2
D1 0.2
P0 = = = $10
r − g 0.1 − 0.08
b=80% b=40%
10%
5
Dt 1 0.88
P0 = ∑ 5 + 5 = $10
t =1 1.1 1.1 0.1 − 0.04
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D1 = p EPS = 0.6 8.33 = $5
g = b ROE = 0.4 0.25 = 0.1
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D1 EPS1 8.33
P0 = = = = $55.56
r−g r 0.15
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D1 5
P0 = = = $100
r − g 0.15 − 0.1
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EPS1
P0 = + PVGO
r
1
P/E=
r
1 PVGO 1
P/E= + >
r EPS1 r
1 ⎛ ROE ⎞ 1 ⎛ ROE ⎞
PVGO = EPS1b ⎜ −1 + ⎟⎠ + EPS2b ⎜ −1 + ⎟⎠ + ...
⎝
1 + r r (1 + r) 2
⎝ r
NPV1 NPV2
1 1+ g
PVGO = NPV1 + NPV1 + ...
1+ r (1 + r) 2
1 1+ g NPV1
PVGO = NPV1 + NPV1 + ... =
1+ r (1 + r) 2
r−g
⎛ ROE ⎞ ⎛ 0.25 ⎞
NPV1 = EPS1b ⎜ −1 + ⎟ = $8.33 0.4 ⎜ −1 + ⎟ = $2.22
⎝ r ⎠ ⎝ 0.15 ⎠
NPV1 $2.22
PVGO = = = $44.44
r − g 0.25 − 0.15
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