cash flow

FVn PV0 (1 r )

PV 1000 r 8 n 10
FV 1000 1 0.08
10002.159 2159

FVn
PV0
n
(1 r )
FV 3000 r 8 n 5

3000
PV
5
(1 0.08)
3000 0.681
2043

FV CFt (1 r )

n t

t 1

FV
CFt t
r
n

CFt
PV0
t
t 1 (1 r )
n

PV
CFt t
r
n

FV A (1 r )

n t

t 1

FV A (1 r )
t 1

n t 1

1+r)

1
PV0 A
t
t 1 (1 r )
n

1
PV0 A
t
t 0 (1 r )
n 1

n n-1

Net Present Value

NPV
NPV PV PV

CFt
NPV C0
t
t (1 r )

I
B
P

t
n
(1 r )
t 1 (1 r )
n

I
n
r
B

DIVt
Pn
P0

t
n
(1 r )
t 1 (1 r )
n

DIVt

DIVt t
n
r
Pn

DIVt
P0
t
t 1 (1 r )

DIV
DIV
P0

t
r
t 1 (1 r )



(Gordon Growth Model)

DIVt (1 g ) DIV1
P0

t
(1 r )
rg
t 1

r (DIV1/P0) g


EPS g Gordon

g EPS

(Payout Ratio)
DIV1/EPS1
(Plowback Ratio)=1
Payout Ratio


ROE EPS1/

EPS1= EPS0+ EPS0

EPS1/EPS0=1+
EPS1/EPS0=1+g
=ROE
1+g = 1+
g Plowback RatioROE


Brealey and Myers

P0 EPS1/r PVGO
PVGO

1
2 NPV


Gordon Growth Model

a) ROE 8

b) 50
c) 10
1 (plowback ratio) 0
EPS 0.0850 4
g 0
P0 DIV/r 4/0.1 40


2 60
DIV/ Payout RatioROE
0.400.08 3.20%

DIV1 0.03250 1.6

g plowback ratioROE 0.600.08 4.8%

Gordon Growth Model
P0 DIV1/(r g) 1.6/ 0.10 0.048)
30.77

8 ROE
10


3 ROE > r
ROE 12
plowback ratio = 0
P0 EPS/r ROE/r
50 0.12/0.10 6/0.10 60
plowback ratio=60
DIV/ Payout RatioROE
0.400.12 4.8%


DIV1 0.04850 2.4
g plowback ratioROE 0.600.12 7.2%
Gordon Growth Model
P0 DIV1/(r g) 2.4/ 0.10 0.072) 85.71

85.71 60 25.71 PVGO

PVGO 25.71

P /EPS
0
EPS/P

EPS1/ P0 4/40 0.10 r 0.10

EPS1/P0 4/30.77 0.13 > r 0.10

EPS1/P0 6/85.71 7 <10 r

PVGO 0 EPS/P r,
0
PVGO < 0 EPS/P >r,
0
PVGO > 0 EPS/P <r,
0

EPS/P
PVGO

PVGO
PVGO

P0 EPS1/r PVGO Bubble

Bubble

Bubble


P0 EPS1/r PVGO Bubble
EPS/r

PVGO
EPS/r

PVGO