Question
Dividends and Stages of Growth Assume the following for a growth company: Todays Share price P 0 = $125 Expected Dividends per share D 1
Dividends and Stages of Growth
- 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, ke:
ke= D1P0+g
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Demonstrate the company is a growth company:
- 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
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- 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
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