Dividends and Stages of Growth

1. Assume the following for a growth company:

Todays Share price	P0 =	$125
Expected Dividends per share	D1 =	$1
Expected Earnings per share	EPS1 =	$5
Shareholders Expected Growth	g =	15%
Steady state cost of equity for similar company	Ke(ss) =	10%.

Using the Gordon growth model determine the firms cost of equity, k_e:

ke= D1P0+g

Demonstrate the company is a growth company:

1. Present Value of Growth Opportunities

Step 1: Calculate steady state P/E

P/E = 1/Ke(ss) (above)

Step 2: Multiply steady state P/E by EPS (above), which equals the share price at Steady State

Steady state P/E x EPS = steady state share price

Step 3: Compare current share price to steady state share price

Current share price steady state share price = growth opportunity

2. Steady-state P/E

Step 1: Compare current P/E to Steady-state P/E

Current P/E = Price per share/earnings per share

Steady state P/E = 1/Ke(ss)

Differential = growth opportunity