Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

Ifweassume,forinstance,astablegrowthrateof 4 percent
(basedonthegrowthrateoftheeconomy)forGoldmanSachs
and a return on equity of 12 percent (based on industry
averages),wewouldbeabletocomputetheretentionratioin
stable growth:


Goldman Sachs will haveto reinvest 33.33 percent of its
earningsintothefirmtogenerateits expectedgrowthof 4
percent; it can pay out the remaining 66.67 percent.


Inafreecashflowtoequitymodel,wherewearefocusingon
netincomegrowth,theexpectedgrowthrateisafunctionof
the equity reinvestment rate and the return on equity.


The equity reinvestment rate can then be computed as
follows:


If, forinstance, we assume thatToyota willhave a stable
growthrateof 2 percentandthatitsreturnonequityinstable
growthis 8 percent,wecanestimateanequityreinvestment
rate:

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