estimatedvaluepershareforGoldmanSachsasafunctionof
theexpectedgrowthratein earningsper shareforthenext
five years.
FIGURE 5.1Value and Expected Growth: Goldman Sachs
To arriveat thecurrentmarket priceof $128, wehaveto
assume an expectedgrowthrate of2.6% forthe nextfive
years. We are holding all other inputs to the valuation,
includingthegrowthrateafterthefifthyearandthecostsof
equity,fixedincomputingthisnumber.Theexercisecanbe
repeatedwithanyotherinput—returnonequity,lengthofthe
growth period, and so on.
What does the difference between our assumptions about
growthandthemarket’simpliedgrowthratetellus?Oneway
to viewthedifferenceisas amargin forerror:Theactual
growthrateinearningspersharecanbesubstantiallylower
thanourbase caseestimateof 16.82%withouthurtingour