For
comments, observations, questions and answers, email; theotherwomaninmarriage@gmail.com
EARNING
MODEL
Some investors like to use an
earning approach for common stock valuation.
He did not say much about
theory – he told us that this will be calculation. So, straight to it guys.
D= E (1-b)
Where:
D = dividend per share
E = Earning per share
(1-b) = Earning retention rate
Earning retention (1-b), is the dividend
payout ratio. Therefore an equivalent earning
based valuation.
Po = E1 (1-b)
K-g
Where:
Po = is the stocks present
value
E1 = Earning
expected at the end of year 1
g= expected earnings growth
rate
K = stock required rate of
return
note that E1 =
Eo(1+g).
So, we have to substitute Eo
(1+g) into the E1.
So where have something like
this.
Po = Eo(1+g) (1-b)
K-g
ILLUSTRATION:
The M & M Corporation
currently has earnings that are N4 per share.
In recent years, earnings have been growing at a rate of 7.5% and this rate is expected to
continue in the future, if M & M Corporation has a retention rate of 40%
and a required rate of retune of 14%, what is M & M current value?
SOLUTION:
Po = Eo(1+g) (1-b)
K-g
Eo= N4
(1+g) = 1+ 7.5%
(1-b)= 1 - 40%
K= 14%
Po
= 4(1 + 0.075) (1-0.4)
0.14 – 0.075
Po=
4 (1.075)(0.6)
0.14-0.075
Po=
2.58
0.065
Po
= N39.69
Explanation:
I
have to do some explanation here: The 4
is earnings per
share. The 1 is constant, while the 0.075 is the 7.5% when divided by 100. Then 0.4 is the 40% in the question.
Now below it, we have 0.14
which is 14% minus 0.075 which is the same 7.5% that represent (g) in our
question. Now you have to solve the ones
in bracket then multiply with 4 before you solve the one below and divided your
answer.
For any question, contact theotherwomaninmarraige@gmail.com
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