Notethattheterminalvaluedecreasesby$16millionbutthe
cashflowinyear 5 alsoincreasesby$16millionbecausethe
reinvestmentrateattheendofyear 5 dropsto40%.Thevalue
of the firmremains unchanged at $1,300 million. In fact,
changing the stable growth rate to 0% has no effect on value:
ILLUSTRATION 4.14: Stable Growth Inputs
To illustratehow theinputs to valuationchangeas we go
from high growth to stable growth, we consider three
firms—Goldman Sachs with the dividend discount model,
Toyota with a free cash flow to equity model, and Titan
Cement with a free cash flow to the firm model.
ConsiderGoldmanSachsfirstinthecontextofthedividend
discountmodel.Whilewewilldothevaluationinthenext
chapter, note that there are only three key inputs to the
dividenddiscountmodel:thepayoutratio(whichdetermines