Theterminalpricehastobediscountedbacktotodayusing
thehigh-growthperiodcost ofequityof9.3%(and notthe
stable-growthperiodcostofequityof8.5%).Thereasoningis
thatinvestorshavetolivethroughtheriskofthehigh-growth
period (and the concurrent cost of equity) to get to the
terminal period. The present value of the terminal price,
discounted back at the high-growth period cost of equity, is:
Thecumulatedpresentvalueofdividendsand theterminal
price can then be calculated.
Goldman Sachs was trading at $128 at the time of this
analysis in November 2005, making it significantly
undervalued.
Clearly,themarketislessoptimisticaboutGoldman’sfuture
growththanweare.Aninterestingexerciseinvaluationisto
estimatethegrowthratethatwillyieldthemarketprice;this
is called the implied growth rate. Figure 5.1 graphs the