# 2. Fundamental growth rate 1) Expected growth in EPS (g eps

```2. Fundamental growth rate
1) Expected growth in EPS (geps)  for stable ROE
geps = b x ROE
Retention ratio (b) = 1-d  %
Div. payout ratio (d) =
or
For changing ROE
g = (b x ROEnew)
-
+
Growth from new investment
LT growth
-growth from existing investment
-ST growth and more efficiency
ROE and Leverage
ROE = ROC + D/E[ROC-i(1-t)]
Return on capital (ROC) =
[
(
)]
Bv of c = BV of D + BV of E
Book D/E =
Int on debt , I =
2) Growth in NI or gNI
For Stable ROE
gNI = ERR x ROE
Equity Reinvestment Rate or ERR =
But For Changing RoE
g = (ERR x ROEnew)
+
3) Growth in EBIT or gEBIT
For Stable ROC
gEBIT =RR x ROC
RR or Reinvestment Rate =
(
)
But For Changing ROC
g = (RR x ROCnew)
+
Choosing Models
1. CF to Equity=&gt; use Div If
 use FCFE If
For -
Ve and
Stable Leverage
2. CF to Firm=&gt; use FCFF
For – Vf and
Changing Leverage
Match CF with r
1.CF to Equity =&gt;Ke
CF to Firm=&gt;WACC
2.US.CF =&gt;US r
Local CF =&gt; local r
3.Norminal CF =&gt; Nornimal r
Real CF =&gt;Real r
Growth Pattern
Model
Stable Growth Model
2- stage
3-Stage
Where : Ke=Rf+β(Rp)
b=1-d where d=
Terminal Valuen =
Frim
Large
Large
Small
g
Low, g&lt;gecon or5%
Moderate,g&lt;gecon+10%
High, g&gt;gecon+10%
Length of Period
Since year0
5yrs
10yrs
For Stable Growth Model
g is stable since yr0 which is 5%
use it to find terminal value where Ve=
And Use DPS1 to Find Ve
For 2-Stage Model
Find g for high growth period by g=b x ROE (depend on what kind of g us use)
Use that g for high growth period but use5 % for stable growth period which is after yr5 to
find next CF or DPS
Ke for each period also different
And finally use DPS6,Ke and g in stable period to find terminal value
Discount each CF or dps with each of its Ke
For 3-Stage Model
Do just the same as 2-Stage model but there are Transition period between high and stable
growth section. All Variable such as Ke g d b are changed over time. You have to calculate
the change of each by use this , change/yr=
. Then you use chang/yr adjust year by
year until the last year to stable growth session. To check whether you done it correctly the
last adjustment will be perfectly equal to stable growth session. For example yr5, g is 10%
and yr10 is5%, decrease by 1%then yr6 is 9, yr7 is 8, yr8 is 7, yr9 is 6 and last decreament,
answer is perfectly equal to stable growth session which is 5% TeeHee.
Thank you for you kindness, have a great time during you preparation for your exam. See
you next term in different subject. jubjub
ik
```