entry (either legal or as a consequence of infrastructure
requirements)thatcanbeexpectedtokeepnewentrantsout
for several years.
ILLUSTRATION5.2: Valuinga Firm with theTwo-Stage
Dividend Discount Model: Goldman Sachs—November 2005
GoldmanSachsisoneoftheleadinginvestmentbanksinthe
world.Assumingthatitcanmaintainitsbrandnameedgefor
afewyears,wevalueGoldmanusingatwo-stagedividend
discountmodel, with fiveyears ofhigh growth and stable
growth thereafter.
Forthefirstfiveyears,weassumethatGoldmanSachswill
maintainitsexistingpayoutratioof9.07%andcurrentreturn
onequityof18.49%.Theresultinggrowthrateiscomputed
here:
Beyond year5, we assume thatcompetitive pressureswill
bringthereturnonequitydownto12%.Assumingagrowth
rate of 4% yields a stable period payout ratio of 66.67%:
To compute the cost of equity, we assume that Goldman
Sachswillhaveabetaof1.2forthefirstfiveyearsofhigh
growthandabetaof1.0beyondthatperiod.Witharisk-free
rateof4.5%andariskpremiumof4%,wecanestimatethe
costs of equity in both time periods: