Firm

Capital ==>

t=0
$100
12%

Capital
ROC
Earnings
Payout ratio
Dividends
Contribution to RE
Ending capital

==> Income

t=1

t=2

$12.00

t=3

t=4

t=5

$12.29

$12.58

$12.88

$13.19

$9.83
$2.46
$104.86

$10.07
$2.52
$107.37

$10.31
$2.58
$109.95

$10.56
$2.64
$112.59

80%
$9.60
$2.40
$102.40

growth rate in div

growth rate in earnings
Discount rate
Price

2.400%
2.400%

2.400%
2.400%

2.400%
2.400%

2.400%
2.400%

12%
$ 100.000
GROWTH rate = (1-Payout ratio)*ROE
2%

Constant growth
t=0
t=1
t=2
t=3
t=4
t=5
t=6
t=7
t=8

D(1)
D(2) = D(1)*(1+g)
..

Price = D(1)/(r-g)

Two-stage Model
From present to t=T growth rate is either very high or non-constant
Starting from T+1 it is constant.
5.15
1
1.5
2
3
5
Pr ice

0.10.503
2
3
4
5
1.1 1.1 1.1 1.1 1.1
1.1
t=0
t=1
t=2

1
1.5

Pr ice

5 . 00
1
1 .5
2
3
0 . 1 0 . 03

1 .1 1 .1 2
1 .13
1 .1 4
1 .1 4

5 . 00
1
1 .5
2
3
0 . 1 0 . 03
Pr ice

1 .1 1 .1 2
1 .13
1 .1 4
1 .1 4

t=3
t=4
t=5
t=6
t=7

2
3
5 Starting from t = 5 the growth rate of dividends is 3%
5.15
5.3045

Assume r=10%
54.48711

t=6

$13.51
$10.81
$2.70
$115.29

2.400%
2.400%