© 1998 The Dryden Press
Example
1. ks = D1/P0 + g = 10%; F = 20%.
2. Investors put up $100, expect EPS = DPS = 0.1($100) = $10.
3. But company nets only $80.
4. If earn ks = 10% on $80, EPS = DPS = 0.10($80) = $8. Too low. Price falls.
5. Need to earn ke = 10% /0.8 = 12.5%.
6. Then EPS = 0.125($80) = $10.
Conclusion: ke = 12.5% > ks = 10.0%.
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