Pvgo Model

Example of the NPVGO model (1) April 27, 2006 Consider a rm that has EPS of $5 at the end of the rst year, a dividend payout balance of 30%, a layabout rate of 16%, and a return on require earnings of 20%. What is the price of a share for this rm? Dividend growth model P = Dividend payout ratio is 30%; then Div = 0:3 $5 = $1:5 0:3 = 0:7: Div ; r g Retention ratio = 1 - Dividend payout ratio = 1 Growth rate, g; g = hard roe Then P = NPVGO model 1.- lever of a cash-cow rm p= retention ratio = 0:2 0:7 = 0:14 Div $1:5 = = $75 r g 0:16 0:14 EP S $5 = = $31:25 r 0:16 2.- Value of growth opportunities Time 1: investing is 70%$5 = $3:5; at 20% return 1 $3:5 + $3:5 0:2 $3:5 0:2 $3:5 0:2 + + + ::: = 1:16 (1:16)2 (1:16)3 $3:5 + $3:5 0:2 0:16 1:14; at Time 2: investment is 70%$5 = $3:5 that grows at a g = 14%; that is, $3:5 20% return $3:5 1:14 + $3:5 1:14 1:16 0:2 + $3:5 1:14 0:2 + ::: = (1:16)2 $3:5 + $3:5 0:2 0:16 1:14 Time 3: investment is 70%$5 = $3:5 1:14 ; at 20% return 1:142 1:16 2 1:14 that grows at a g = 14%; that is, $3:5 $3:5 1:142 + $3:5 0:2 $3:5 + 1:142 (1:16)2 0:2 +::: = $3:5 + $3:5 0:2 0:16 1:142 and so on and so forth.

If we sum all the NPV of growing opportunities discounted at while 0 we bring forth $3:5 + $3:5 0:2 0:16 + 1:16 $3:5 0:2 0:16 1:162 $3:5 0:2 0:16 1:163 N P V GO = factoring out $3:5 + 1:14 + $3:5 + 1:142 +::: $3:5 + $3:5 0:2 0:16 ; we have 1:16 N P V GO = $3:5 + $3:5 0:2 0:16 1:16 = $3:5 + $3:5 0:2 0:16 1:16 1 1 1:14 1:16 1+ 1 :14 1:142 + + ::: = 1:16 1:162 1:16 = 1:16 1! :14 = = $3:5 + $3:5 0:2 0:16 1:16 $3:5 + $3:5 0:2 0:16 1:16 1:16 = 0:02 $3:5 + $3:5 0:2 0:16 = $43:75 0:02 So summing (1) and (2) we obtain P = EP S + N P V GO = $31:25 + $43:75 = $75 r 2 If you want to line up a full essay, baseball club it on our website: BestEssayCheap.com

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