5. One way to value a share is the dividend growth or growing perpetuity model. Consider the following: the dividend payout ratio is 1 minus b, where b is the ‘retention’ or ‘ploughback’ ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio.

Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share today:

What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain. Electronic Timing Company (ETC) is a small company founded 15 years ago by electronics engineers Tom Miller and Jessica Kerr. ETC manufactures integrated circuits to capitalise on the complex mixed-signal design technology and has recently entered the market for frequency timing generators or silicon timing devices, which provide the timing signals or

‘clocks’ necessary to synchronise electronic systems. Its clock products originally were used in PC video graphics applications, but the market has subsequently expanded to include motherboards, PC peripheral devices and other digital consumer electronics, such as digital television boxes and game consoles. ETC also designs and markets custom specific-application integrated circuits (SAICs) for industrial customers. The SAIC’s design combines analogue and digital or mixed-signal, technology. In addition to Tom and Jessica, Nolan Pittman, who provided capital for the company, is the third primary owner. Each owns 25 per cent of the 1 million shares outstanding. The company has several other individuals, including current employees, who own the remaining shares.