You are on page 1of 1

# 3.

Assuming a sustainable growth rate of the company nearly close to the GDP growth, we can arrive at a combination of payout ratio and ROE. As ROE x (1 - dividend-payout ratio) = Sustainable Growth Rate, which we have assumed to be close to 8.5%. We take a five year average of predicted ROE for the period 2013-18 and take it as the ROE for the long run. It comes out to be 17.18%. Taking a five year average usually cancels out the effects of business cycles as the company matures and ROE settles to a range of values. When calculating the the payout ratio, we observe the trend in the predicted model that the values freezes to a value around 50% meaning that the company plows back 50% of its earnings. We have taken the assumption that the next 3 year discount to be 14% and then 13.5% onwards in the future. The current risk free rate in the market is around 8.7% and the beta for stock is 1.03 (1.03 x 8.7 = 9 ). The Market risk premium is taken as 5% for the next 3 years owing to the current market conditions. Further after that, we have reduced the discount to 13.5% as the market is showing stellar performances and will reach its potential again in years to come. Putting values in the equation, ROE x (1 - dividend-payout ratio) = 17.18% x (1 - .5) = 8.59 (SGR)