Class Notes (922,779)
CA (542,981)
UTSC (32,983)
Management (31)
MGFC10H3 (7)
Lecture 6

NPVGO.pdf

2 Pages
157 Views

Department
Management
Course Code
MGFC10H3
Professor
Sultan Ahmed

This preview shows half of the first page. Sign up to view the full 2 pages of the document.
Given E1 = $5, D1 = $3, b = 0.4, k = 0.15, and g = 0.08. [In this example, we assume the
constant growth model, that means the firm has constant growth opportunities in every
year.]
What is ROE? ROE = g/b = 0.08/0.4 = 0.2
Value of the firm if no growth =
33.33$
15.0
5
.
Value of the firm with growth =
86.42$
08.015.0
3
.
Then NPVGO = $42.86 $33.33 = $9.52
Or we can calculate NPVGO directly. Let’s look at the time line below:
Period ………
………
1st growth opportunity
………
2nd growth opportunity ………
3rd growth opportunity ………
4th growth opportunity ………
5th growth opportunity ………
-2.720978
0.46656
0.503885
-2.519424
0.4
0.432
-2.3328
0.432
0.46656
0.432
3
-2
0.4
0.4
0.4
-2.16
5
5
5
5
5
0
5
1
4
2
At the end of year 1, the firm reinvests 40% ($2) of its earnings and this investment will
generate a profit of $0.4 ($2*0.2) per year in years 2, 3, 4, …….( Since ROE = 20%).
*D1 = $5 $2 = $3
Therefore, the total earnings = $5.4 in year 2. As the firm keeps the same payout ratio, it
reinvests $2.16 ($5.4*0.4) in year 2. This second GO will generate earnings of $0.432
($2.16*0.2) per year forever.
*D2 = $5.4 $2.16 = $3.24 (= $3*1.08)
So the total earnings in year 3 = $5.832, reinvests $2.3328 ($5.832*0.4) and earns
$0.46656 per year forever.
*D3 = $5.832 $2.3328 = $3.4992 (=$3*1.08*1.08)
You can calculate the same for year 4, year 5, year 6, …….

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Given E5 D3 b04 k015 and g008 In this example we assume the 11constant growth model that means the firm has constant growth opportunities in every yearWhat is ROE ROEgb00804025Value of the firm if no growth33331503Value of the firm with growth8642080150 Then NPVGO42863333952Or we can calculate NPVGO directly Lets look at the time line below305142Period555550420404041st growth opportunity0432043204322162nd growth opportunity 046656233280466563rd growth opportunity050388525194244th growth opportunity27209785th growth opportuni
More Less
Unlock Document


Only half of the first page are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit