basedontheinitialgrowthrate,thestablegrowthrate,and
thelengthof theextraordinarygrowthperiod.While small
deviations from this assumption do not affect the value
significantly, largedeviations can causeproblems.Second,
theassumptionthatthepayoutratioisconstantthroughboth
phasesofgrowthexposestheanalysttoaninconsistency—as
growth rates decline the payout ratio usually increases.
Theallowancefora gradualdecrease in growthratesover
timemaymakethisausefulmodelforfirmsthataregrowing
rapidlyrightnow,butwherethegrowthisexpectedtodecline
graduallyovertimeasthefirmsgetlargerandthedifferential
advantage they have over their competitors declines. The
assumptionthatthepayoutratioisconstant,however,makes
thisaninappropriatemodeltouseforanyfirmthathaslowor
no dividends currently. Thus, the model, by requiring a
combinationofhighgrowthandhighpayout,maybe quite
limited in its applicability.
3
ILLUSTRATION5.3:Valuingwith theHModel:Barclays
Bank
Barclays is an internationalbank with roots in the United
Kingdom.Itpaiddividendspershareof£0.240onreported
earningspershareof£0.512in2004.Thefirm’searningsper
sharehavegrownat8%overtheprior fiveyears,but that
growthrateisexpectedtodeclinelinearlyoverthenextfive
yearsto 3 percent,whilethepayoutratioremainsunchanged.
Thebetaforthestockis0.9,theBritishpoundrisk-freerateis
4.2%, and the market risk premium is 4%.