So…I understand how they calculate V = D(1+g)/(r-g) and then use the V = E/r+PVGO formula to calculate PVGO. However …I took a slightly longer (nooo idea why) approach…which went something like this We know E = 4.5 r = .15 ROE = .0833 D/P = .40 I used to formula V=1/r+PVGO/E PVGO/E = FF*G or PVGo = FF*G*E FF = 1/.15-1/.0833 = -5.33 g = .0833*(1-.4) = .05 G = .05/(.15-.05) = .50 Hence PVGO = -5.33*.5*4.50 = -12 Then plugging that back into V = 1/r+PVGO/E V = 1/.15+(-12/4.5) = 4 Howcome using this formula …the value of the stock does not come out to be 18 ??? I understand their method…but I’m wondering what I’m missing as I don’t get V = 18!!
ur right on the value of PVGO. however, that forumula should still work for Vo mmmmm
you forgot to multiply by E = 4.5 4*4.5 = 18
Oh yeahhh…what I calculated was V/E = 1/r+PVGO/E …basically i calculated PE…correct? so to get to price…I have to multilpy by E. thanks a ton ! can’t believe that didn’t hit me…!