4 areexpectedtocontinuegrowingatthoseratesforaninitial
period,butareexpectedtostartdeclininggraduallytowarda
stablerateasthefirmbecomelargerandlosesitscompetitive
advantages.
ILLUSTRATION 5.4: Valuing with the Three-Stage
Dividend Discount Model: Canara Bank—November 2005
Canara Bank is a midsize bank in southern India that is
registering rapid growth as the overall banking market in
Indiagrows.Shelteredfromcompetitionfromforeignbanks,
CanaraBankreportedareturnonequityof23.22%in 2004
andpaidoutdividendspershareof5.50rupeesthatyear(on
reportedearningspershareofRs33.27).Wewillassumethat
its protected position will allow the bank to maintain its
currentreturnonequityandretentionratioforthenextfive
years, leading to an estimated expected growth rate in
earnings per share of 19.38%:
Thecost ofequity forthehigh-growth periodis estimated
usingabetaof1.1forCanaraBank(basedonthebetasof
otherIndianbanks),theIndianrupeerisk-freerateof6%and
a market risk premium of 7%(reflecting a mature market
premiumof4%andanadditionalcountryriskpremiumfor
India of 3%).
5