boken kap 5 del 3 Flashcards
Q: What does P_0 represent in the context of equity?
A: The present value of an equity investment.
Q: How is the value of a firm’s equity to an investor determined?
A: It is the present value of all expected future dividends
Q: What two factors determine the value of a firm in the dividend growth model?
A: The growth rate (g) and the discount rate (R).
Q: How is the retention ratio calculated?
A: (retained earnings this year)/(Net income)
Q: Where does the growth rate (g) come from?
A: Retaining some of the earnings. retention ratio × return on retained earnings.
Q: What is the formula for earnings growth?
A: 1+g =1+(retention ratio×return on retained earnings)
What should we not forget when we do these calculation?
Our variables is just ESTIMATES, we don´t know that they will be what we think they will.
Q: How is the discount rate R calculated?
A: R=dividend yield + g
Q: What are the two components of the discount rate R?
Dividend yield (Div_1)/P_0 and
Capital gains yield, g, the rate at which the value of the investment grows.
Q: Why should we be skeptical about estimates of g and R?
- g is based on assumptions and is an estimate, not a determination.
- The determination of R is highly dependent on the estimate of g.
- If g is equal to or greater than R, it suggests a problem, as a firm cannot grow indefinitely.
- We should be skeptical with R, especially in extreme cases.
Q: What is the formula for the value of a share when a company acts as a cash cow?
A: EPS/R= Div/R
Q: What does NPVGO stand for, and what does it represent?
A: NPVGO stands for Net Present Value of Growth Opportunities, which represents the per-share value of the firm’s growth opportunities.
Q: What is the formula for the share price when a firm commits to a new project?
A: EPS/R + NPVGO , in other words, value if we don’t invest + value if we do.
