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European Equity Valuation & Analysis

Bloomberg is a global, multimedia-based distributor of information services, combining news, data and analysis for global financial markets and businesses. Bloomberg provides real-time pricing, data, history, analytics and electronic communications 24 hours a day, 365 days a year and is used by over 200,000 financial professionals in 90 countries world-wide. The company has established a unique position within the financial services industry by providing a broad range of features, combining information and analysis, in a single package. The Bloomberg is the definitive source of indicative data for all securities, statistics, indices and research covering all key global securities markets including Equities, Money Markets, Currencies, Corporates, Governments and Derivatives. Bloomberg users also have the ability to consider alternatives and evaluate complex scenarios through the service’s unique analytical capabilities. In today’s session, we will focus on several methods of assigning a value to common stocks using both Bloomberg data and analytical tools. We will look at ways to gather valuation ideas and ways to monitor price movements on groups of companies. Essentially, we will focus on two general methods of stock valuation: Balance Sheet Valuation and Dividend Discount Valuation. In order to do this type of valuation, we need to work with solid, accurate, and comparable data. We need tools to identify companies, to identify the competition, to calculate the ratios for the companies, and to compare companies within their industry groups and with a precise group of companies that you select. Lastly, we will focus on several Dividend Discount Models using the PC or open Bloomberg. We will produce a range of values for a stock and compare that range to the actual traded price. In order to do this, once again it comes back to data as well as fast access to risk free rates, beta calculations, market returns, stock prices, dividends, sustainable growth rates, and the like. The model will serve as a monitor so that you can keep abreast of your company’s values against the traded prices.

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Bloomberg Basics Each Bloomberg user (whether you share a terminal or not) is entitled to receive his/her own log-in name and password to customise and store personal functions. The analytics desk or your account rep can assign you a name and password. How to Log In (1) Press the RED DEFAULT KEY at the top of your keyboard. (2) Type your assigned NAME. If less than 8 letters use the tab key and type in your PASSWORD. **** will appear so no one can read your Password. Press <Go>. Accessing Market / Security Information <yellow key> <Go> Menu of general analytics which can be performed on a specific market sector. ‘XXX’ <Go> Access a specific function directly, where ‘XXX’ represents 3-4 letters (or mnemonics) used to identify a specific function (for example, typing WEI<Go> will bring you to a screen of World Equity Prices). <yellow key> TK <Go> Access a list of all companies, issuers, currencies, commodities, indices beginning with specified letters. Ticker symbols are usually to the right of the name and must be used to identify any security on the system. Ticker <yellow key> <Go> Access one security menu of analytics. Once on the one-security menu for a particular security, the analytical functions are available by typing the menu number that corresponds to the function or by entering the Bloomberg mnemonic and <Go>. ID (space) Security # <Go> Access one security menu (A great way to access a security if you do not know the appropriate market sector). Security ID numbers include: CUSIP, Valoren, SEDOL & ISIN. Ticker Coupon (space) Maturity <yellow key> <Go> Access Corporate or Government menu. Ticker <yellow key> XXX <Go> Access specific analytics relating to specific security, by-passing menu. To view the two-security function you must define the two securities to be analysed e.g. Ticker <yellow key> Ticker <yellow key> <Go>. <Menu> Always press <Menu> to return to previous menu of options. <Help> Press <Help> from any screen to get complete definitions of terminology, formulae and applications of every screen. Press <Help> again to return to screen. BH <Go> Bloomberg Help. Use to search through Bloomberg’s databases and get information about company names, brand names (and who owns them), Bloomberg screens, dictionary terms, indices / statistics and people. For further assistance type <Help><Help> and type your question to the 24 hour help desk

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Bloomberg News Bloomberg News is a proprietary, 24 hour news service which provides coverage of all markets world-wide from it’s 500 journalists and bureaux in major cities around the world. BN combines original stories by renowned reporters that go beyond just the realm of reporting on current news events to provide insight. Combined with computer generated reports, which utilise Bloomberg’s vast database, the result is a unique, world class news service whose stories regularly appear in over 75 major newspapers around the world.

Bloomberg News is accessed through a system of menus, in addition to the main BN menu (type BN <Go>). Sub Menus include News by Region, Corporate News, Earnings Analysis, Government News, Calendars, Press Summaries, Columns, Special Reports, Surveys, and Corporate Filings. All News stories are archived and stored historically. News stories, research reports and multimedia reports (designated by ->) relating to a specific company are stored under the company news section of its single security menu (type CN <Go>).

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A great way to familiarise yourself with what’s going on in the world is to access our continuously updated listing of the days most important headlines - both financial and world-wide general interest can (type TOP <Go>).

All BN news stories carry the name and telephone number of the journalist filing the report. If you have any questions or want to know more - simply call him or her up and ask. Also listed at the end of each BN story is a list of relevant news categories, tickers and functions that you can investigate to learn more about the topic in question.

It is obvious that prior to going through the process of valuation, we must first have sufficient ideas so that we can go about the process of identifying industries and companies to value in the first place. Let’s take a direct approach and look at one way of generating ideas on Bloomberg. The function BBCO<GO> provides a handy source for just those sorts of news articles that can help generate investment ideas.

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Industry & Sector Analysis With Bloomberg you gain significant flexibility in both the way you look at sector data as well as the number of portfolios and indices you can use. To begin, consider the function IBQ that gives you the ability to look at everything provided by Bloomberg relative to any given industry, on one screen. It makes it very easy to follow the news, for example, on that industry. The screen on the left shows the main IBQ screen while the one on the right gives you the information for the airline industry.

Additionally, you can page forward from this point and bring in an automatic spreadsheet that provides you with relevant industry ratios.

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Sector Analysis First, let’s look at what markets have performed the best around Europe during the past year. Just type WEIS<Go>:

Now we need to determine which sectors have performed the best in over the last year. Type GMEN<Go> to see a matrix of functions and indices.

The next step is to break down selected indices to see how the various sectors have performed within that index. For example, the BE500 Index can be broken down using the function GRR to produce the result below:

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The GRR screens show very high returns in the computer sector over the six months across the European continent. To see how the individual companies within that index have performed over the past year, type the number next to the index on the screen followed by MRR<Go>.

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Sector Analysis Using the Custom Report Writer: PRPT The Custom Report Writer, PRPT, can be used to create “three dimensional” reports that can give you significant information about your index or custom portfolio that you literally cannot get elsewhere. The benefits include bringing the entire Bloomberg database to bear on your particular problem in order to answer specific questions about both the behaviour of indices as well as companies; the function can be used over and over again against other indices and custom portfolios. To see how this works, import an index using the function IPRT. For example: BE500<Index>IPRT makes the Bloomberg 500 Index your current portfolio and gives you access to all the client key functions.

Here you can see an overview of client functions. This unites all Bloomberg data, analytics, and news so that you can follow and manage your portfolio as closely as you want. All of these functions apply to both custom portfolio as well as benchmark indices. To see how the Custom Report writer works, type 3<go> from the above screen then choose to look at the Custom Report Writer by typing the number from the menu to bring up the following list of templates as well as the place to create new reports.

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From this screen, it is possible to bring up previously built templates as well as to build a new template. Simply type the number next either “new report” or next to a previously built template.

Here we have selected number 34 from above, a report called “Equity Risk & Return”. Notice from the above set-up screen that it has three sections: the summary page, the set-up grouping, and the set-up security level numbers 2, 3, and 4 from the above screen. You can build each one separately by typing the number associated with each section.

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Set-up The Summary Page: PRPT You can select up to 16 fields to build your summary page. These fields are selected from over 3,000 data fields in the data categories as seen on the screen below.

To build the group section of the report, I need to indicate what type of subgroups I want to create. For example, in this function, I can create subgroups with 17 different fields depending upon the nature of template I am designing. Then, you simply choose your fields in the same manner as in the summary section above.

Notice that the screen above gives you an idea of what this section of the completed report will look like. In this case, we will have the nine industry sectors down the first column. If we had chosen Beta however, we would see beta ranges or buckets in that column. The last portion of the report is the information for the individual security. Choose the fields you want in the same manner

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The output report is available on RPT and can be automatically printed from the first page when the report is set up. The printed version is the second handout from this conference. One part of the PRT report is shown below.

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Fundamental Financial Statement Data Company financial data on Bloomberg is harmonised in accord with an international chart of accounts. All public data is collected and sent to our research centre. The researcher manages the data into one of six sector templates and ratios are calculated. For each sector, common and unique ratios are presented within a five year trend. Over 30,000 companies are covered in this manner. So Bloomberg directly controls the quality and timeliness of the data. We have done more work than any other organisation toward the goal of harmonising the financial presentation of companies in order that their performance might be compared internationally. The line item definitions have been made transparent via the function FDO:

Next, we need to focus on the quality of the data we will be using in our applications. Importantly, we will be using this same data in the applications on the Bloomberg as well as the models on the open. In other words we will be downloading Bloomberg data into our excel spreadsheets. Next, we might want to identify a specific set of companies filtered for a basic set of criteria. You may choose to use the information gleaned from the PRPT report to help specify the criteria for the ESRC. Type ESRC<Go> to get to the main menu.

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QSRC <Go>: Equity Search

The search engine you need on Bloomberg to help you find those companies that meet your requirements can be found by typing QSRC<Go>. This function allows you to search the entire database to isolate exactly the companies or securities that fit your unique criteria. Industry groups (defined on three levels), countries, indices, and scores of fundamental and technical fields (including forward looking, currency adjusted and common size) are all available criteria. Those companies that meet all of your criteria are then displayed (and can be further sorted) in a fully customisable spreadsheet format similar to that used in our relative valuation screen (see RV) allowing you to immediately compare the relative merits of the qualifying securities against a choice of secondary criteria (from a choice of over 3000). Searches can be built using default templates or design your own custom templates. In either case, you have access to the vast 3,000 field Bloomberg database. This is important because we want to fit our product into your work and not the other way around. You design the type of search you want using the specific fields you want. Other features include the possibility of storing searches for those cases where the same set of criteria are relevant on several occasions and the ability to download qualifying securities into a portfolio allowing you to use the extensive range of portfolio functions to monitor and analyse the securities more efficiently.

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DES <Go>: Company Description Start any analysis of a company with the Bloomberg Description pages (enter ‘tkr <Equity> DES <Go> or if you’ve already defined your stock, just DES <Go>).

Following a short synopsis of the company’s main businesses, DES displays: ��The company’s address, telephone & fax numbers, e-mail address, web pages, advisors, officers, and share information.

��A comprehensive snapshot of 45 leading financial ratios arranged by category.

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��Latest shareholder information, including details of the latest issue and institutional ownership. ��A recap of the company’s recent turnover and earnings per share history

��A breakdown of the company’s turnover by both major product area and geographic area.

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��The company’s latest Income Statement, Balance Sheet and Cash flow Summary. ��The company’s Top Shareholders

This data is entered and maintained in our data facility in Princeton N.J. exclusively for subscribers to the Bloomberg and are continuously updated. After a quick overview of the DES screens, we find that the company may require additional analysis. The basic data is stored on the CH set of screens. CH2 outlines the income statement in accord with the Bloomberg set of definitions on FDO.

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CH3 is the balance sheet overview with the detail for both the assets and liabilities specified behind 1<Go> and 2 <Go> respectively. It is this data, which is the source for the FA set of screens.

The cash flow statements are also available for all companies using the same harmonisation template. Notice that one click from the CH screen, all the data can be downloaded to excel.

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FA<GO> FUNDAMENTAL ANALYSIS

When investigating the Fundamentals of a company it is important to be able to judge the ratios in their appropriate historical context to see whether they are improving or deteriorating as well as against those of their peers in the industry. FA displays a variety of ratios and other techniques (such as common size statements) that are useful in determining the value of a company from a fundamental perspective. These are grouped together under a number of generic categories from Valuation, Ratio Analysis and Debt-Equity Analysis to Income Analysis and Cash-flow Analysis. All ratios and line items are displayed in context of the most recent five years (or quarters or half years) along with 5 year geometric growth numbers, arithmetic growth numbers or 5 year averages for each item. The growth numbers help to identify and quantify trends while the latter allows you to smooth the data over a typical business cycle to avoid distortions from year to year. Behind the numbers are bar charts of the main items and ratios again making it easy to identify and quantify trends. It is also possible to customise and print a compact but comprehensive report.

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The above two pictures of Bloomberg screens reflect the basic Bloomberg data presentation. All financial statement data is presented in accord with the Bloomberg template. The template is on the system under FDO<go>.

The Bloomberg template explains in detail exactly what we have done with the company issued financial statements. It also explains what unique factors have arisen as a result of a country’s GAAP, or unique reporting requirements.

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From time to time you may have questions about our company fundamental data. It’s easy to find the name of researcher responsible for the presentation of the data on the system, just type ANB<Go> You can MSG the person or phone them to get your question answered or have another private or public company added to the system.

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Relative Value: RV<GO> The RV function allows you to compare groups of companies. These could be a default group of competing companies, an index, or a portfolio within a pre-set customisable spreadsheet. RV can accommodate your needs to customise the companies within your industry group. The columns of your spreadsheet might contain risk, return, profitability, earnings estimates, et al, over 3000 parameters to choose from. Now that we have established the norms for our valuation parameters, we can choose to find all the other airlines in Europe that meet your requirements using ESRC.

The best guide to the true valuation of a company is to compare it with its peer group. The Relative Value function, RV, displays analytical data comparing your selected security to securities within the same industry. For each of the 20 data items chosen from a choice of over 3000 you can compare your company’s ‘score’ not only against those of other individual companies from the same industry but also against an average for the industry group as a whole. What’s more, if you don’t like the way we have defined the industry you can change it by adding or subtracting companies until it more accurately reflects the relevant group for your particular analysis. Other features include the ability to sort the group by one of your chosen data items, the ability to rank using a combination of weighted criteria, the ability to store up to 20 different reports (or templates) allowing you to easily compare companies in a host of different ways depending on the circumstances and, finally, the ability to print a report which together with FA and selected pages from DES makes a comprehensive analytical package. As well as helping to cope with questions on less familiar companies FA and RV can also be used to support arguments or analysis on companies with which you and are familiar by comparing them to either companies in the same sector which the analyst does not cover or to sector benchmarks that include companies that the analyst does not follow. After finding the companies that meet your criteria, you might want to determine how individual companies have performed against the mean given certain criteria, or you might want to create a custom index so you could see how the price has performed over the past year or two years. Notice from the ESRC menu screen you can elect to build a portfolio. Not only is the portfolio built for you electronically, but you also get the full array of Bloomberg portfolio functions. What’s more, you have a full selection of Bloomberg index functions for your custom portfolio.

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To create on index with the companies you found in QSRC, type 5<Go> from the main menu of the specific search. You will then see a screen called “Portfolio Update” which asks you for a currency code and asks you to save this index/portfolio under numbers 1 through 16. The screen that you will see will look like this:

At this point, the system is linking your set of stocks with the Bloomberg portfolio system. This process of linking QSRC with the portfolio system has a number of benefits:

• You can structure a set of custom indices to track sector performance on a Pan-European basis. • If you want to see how that same index would have performed in a different currency, just

change the currency and rerun the PHST, price history • Graphically, you can see how various benchmark indices would have performed under a variety

of assumptions. Typically, how would the FTSE 250 index have performed since the start of the year if it did not contain any companies in the oil exploration industry?

• Your custom indices are stored and you can use them in connection with portfolio functions.

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Above is the basic menu for further customising the index. You can elect to rebalance the index and to run the price history for every trading session for the past year. The system will do the currency conversion for you.

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Portfolio Evaluation From the PBSK screen, type PORT<Go> to make the cyclical custom index your current portfolio. The advantage of this is you access to all the full array of Bloomberg analytic screens. Type 3<Go> for the Equity Analytics menu, which you can see below.

The full array of Bloomberg portfolio functions is available. The benefits: you can look at the news on the companies in the portfolio, monitor the prices, and run performance reports against various benchmark indices or portfolios. From the above menu, type 4<Go> and you will see the RVP function which is the same as RV. This function will calculate the average value or ratio for the group as long as there are fewer than 100 securities in the group. Additional analytics include the ability to look at the attribution of your portfolio’s performance with respect to: Beta, P/E, Yield, Price/Book, Market Cap, Industry, Currency and Company exposure. Other reports will allow you to determine the risk and return parameters of your portfolio, and to look at the news relevant to your portfolio. Attached to the back of this handout is the printout from the PRPT function.

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The PRPT can be one or multi-dimensional and offers get flexibility so that you can structure your reports exactly the way you want to. In the back of this handout, you will find the printouts for the PRPT for three portfolios, the one for the special banks group from our ESRC, one for the Banks In Play called BIP, and one for both of these groups together call Allbanks. For example, we can see from the summary pages that the beta for the banks is much lower for the ESRC derived banks group called banks while the beta for the other two groups is much higher. Importantly, the valuation indicators are lower for the banks group, while the returns are higher. All of these are calculated on a weighted average basis.

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Communications Tools Communicate efficiently with your clients throughout the world. Portfolio managers and salespeople spend a tremendous amount of time on the phone. Phone conversations can be time consuming, distracting and inefficient.

Bloomberg provides an interesting alternative to telephone communications through an electronic mail message system. This has many benefits:

��Communicate with a busy fund manager whom you might not be able to reach by phone. The message system allows you to bypass secretaries or assistants. You can send messages to the key decision maker and determine if your message has been read.

��Send a message to multiple people simultaneously. If you are looking to sell a list of stocks you can electronically transmit an offer list to your favourite clients.

��Communicate with colleagues and clients throughout the world in different time zones. This is especially critical if your business is global.

��Send News stories to other users or archive the story for future references. ��Send Research to other users. ��Send Multimedia and Audio stories to other users. ��Send files from Bloomberg to an Internet address. ��Open Bloomberg users can send and receive PC File Attachments via their Bloomberg without any worry

about software viruses. ��Open Bloomberg users can send Bloomberg Screens as attachments.

The Bloomberg message system can be your super-highway for communicating and interacting with both the buy-side and sell-side communities in the securities industry. Type <Message> <Help> to start communicating with Bloomberg clients around the world. Type BMAIL <Go> for recent enhancements.

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Research, Recommendations, and Earnings Estimates Bloomberg provides the ability to quickly determine what the analysts recommend about the company’s stock as well as a comprehensive body of written research. To see the recommendations, type ANR<Go>. For example, for Roll Banca type ROL IM <Equity> ANR:

To see what any particular analyst is recommending for the rest of his or her coverage, just type the number next to their name. From the resultant list, see what the price was when they first recommended the stock and compare that with today’s price by typing the number next to the company name. Now to look at the research available over the system, type BRC from the company menu and you will see the available research for the company. The research may be brought up directly on your system if you have Bloomberg on a PC version and if you have been permission by the third party vendors. See your Bloomberg account rep for the details or type BR<Go> for a general overall research menu.

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. All company public documents can be retrieved from Bloomberg by typing CF<Go> from the company menu.

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Dividend Discount Model on Bloomberg: DDM <go>

Just type DDM<go> from any company menu to see the inputs for the model. The model calculates a theorectical price for a stock, given a stream of expected cash flows, a discount rate, growth rates, beta, and a host of other fields. Once all of your assumptions are made and inserted, the function calculates a theoretical price by discounting the cash flows at an appropriate rate reduced by a growth factor. This theoretical price is compared with the actual price in the market. If the market price is less than the theoretical price, then the buyer of the security is able to buy the stock at a price that will enhance his expected return.

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Using Bloomberg Data In Excel Spreadsheets To Value Common Equities We have developed several sample models of the Dividend Discount Model (DDM) style in excel for demonstration purposes. We have taken the group of companies identified in ESRC. The idea is to identify buy opportunities among the group using our DDM five step models and determine if there is sufficient consistency with the underlying fundamentals. The five models include: • Constant Growth DDM • Variable Dividend Growth DDM • One Year Horizon DDM • Price/Earnings Multiple • Price/Book Multiple • Cash Flow DDM The user has the option of using different combinations of the models to set a range of theoretical price values that are then compared to the actual traded prices. If the investor can purchase the stock today at a price that is lower than the theoretical value, then the investor is earning at least the required return specified in the model. Standard formulae are used throughout in the specification of the models. The result is a chart as specified below:

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The values for each of the stocks are contained in a set of sub pages as per below:

I. Overview of Models Asset-Based Models Value = Assets - Liabilities In this type of model, the market value of the liabilities is subtracted from the market value of the individual assets to determine the market value of the equities. II. Discounted Cash Flow Models The market value of the equity is the discounted value of all future cash flows. Cash flows may be based on earnings, dividends, or free cash flows. The r is the required rate of return.

CF Value = (1+r) With the right assumption, the two models can yield the same result. For example, When the ROE is equal to investors required return:

Value = $100/.12 = $833.33 = .12 x $833.33

One Assumption: Assets and Liabilities market values are measured in the same way for all companies in all countries.

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Asset Based Models A good example can be found in the FA report, Number 1. If book value is $33.33 and market value is $41.67: we expect this to be the norm. Book value measures the sum of the parts; market value should capture the added value of those parts, thus making the stock appear a good investment. 1. Underlying Theory If a company can earn more on its book value than investors demand:

CF = ROE x BV =(RR x BV) + (ROE - RR)BV and

Value = [RR x BV + (ROE - RR)BV]/RR = BV + [ROE - RR/RR]BV Example: ROE = 15%, BV = $833.33 and investors require 12% return, CF= 15% x $833.33 = $125 and the PV will be $125/.12 = $1041.67 [(.15 -.12)/.12]$833.33 = $208.33 + $833.33 =$1041.67. If there are 25 share of stock, the BV per share =$33.33 and MV per share = $41.67. 2. Measurement of Book Value • True market values for plant and equipment may be hard to determine to the extent the accounts are

based upon historical costs • Intangible assets may also present a problem • Firms with low profitability • Allocation of revenue and expenses to specific time periods (management’s decision) Solution: RV on Bloomberg identifies similar firms and will compute for you the Market to Book Ratio. On a relative basis, these ratios are then comparable among the companies in the group. 3. Trend in Book Value Even if ROE remained constant, if book value grows then earning will grow. There are several factors that affect the trend in book value: * Earnings retention: (1-PAYOUT RATIO) X ROE = the growth rate of book value (1-20%) x 12.5% = 10% * New Equity Financing: Sales of new equity at a price exceeding book value will increase book value per share. Sales below book value will lower book value per share. XYZ Corp has 1000 shares of stock outstanding with a market value of $25 per share. They sell 100 more shares and raise $2500. If the original equity account is: Common Stock (1000 shares @ par =$2) $2000 APIC 15000 Retained Earnings 10000 Original book value per share is $27 per share

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The new accounts will be: Common Stock (1100 shares @ par =$2) $2200 APIC 17300 Retained Earnings 10000 The new book value per share is $26.82 *Acquisitions: Purchase Accounting Rules v Pooling Accounting Rules In purchase accounting the above applies, in pooling the new shares are reflected at the book value of the acquired company. If the book value per share of the acquired company is larger than the book value per share of the acquirer, then the acquirer’s book value will increase. * Exchange Rates: As foreign functional currencies appreciate, book value per share rises and when they depreciate, book values fall. Bloomberg RV can be used to evaluate the effect of new financing and mergers on the book value of companies. Likewise, the cross currency functionality of the system will allow you to examine the FX over time against the book value of a company. Discounted Cash Flow Valuation Models The focus is on cash flow as represented by: • Dividends • Accounting earnings • Free Cash Flow All the above can be isolated on the Bloomberg: DVD, CH2, CH3, CH6, FA, and RV 1. Dividend-Based Models The value of a firm’s equity is equal to the PV of all future dividends P = D1/(1+RR) + D2/(1+RR)^2 + D3/(1+RR)^3 + … This is the basic model but it needs to be modified to handle the fact that dividends far into the future are difficult to forecast. * No-Growth or Constant Dividend Model: Assumes constant dividends. P = D1/RR * Constant Growth Model P = D1/(RR-G) If ABC’s most recent dividend is $4.50 and you expected it to grow by 3% forever and you expected a 10% return then: P = $4.50(1.03)/(.10 - .03) = $66.21

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* Earnings Based Models If PO is the payout ratio (DPS/EPS), then the dividend valuation models can be rewritten in terms of earnings. P = (PO x E1)/(RR-G) Objective Earnings Definition Discount Rate Bloomberg Tools Equity Net Income From CAPM RV, GGR, BETA, TRA Firm Net Operating Inc Wgt Avg COC FA, RV If Net Income after tax is equal to $2000, and a 10% return is required, P=$2000/.10, or $20,000 For a valuation of the firm, Net Operating Income can be found from CH2 and RV. It is EBIT less Tax. Also, the weighted average. The Capital Structure and the cost of each component of capital can be found on the Bloomberg. If a firm has a capital structure that is 25% debt and 75% equity and a 10% Required Return with 7.5% cost of debt: 75% x .10 + 25% x .075 = .09 Therefore, the value of the firm is: $2400/.09 = $26,667 * Sustainable growth rate = (1-Payout Ratio)ROE = g P = ((Payout Ratio)Earnings)(1+g))/(RR-g)

= .8($2000)(1.03)/ (.10-.03) = $23,543

The payout ratio, the earnings, the growth rate are available off the CH2, FA, RV * Estimating Growth: g a) g = (1-Payout Ratio)ROE A growth firm, by definition exists when ROE on new investment exceeds the RR. If a firm’s current opportunities are similar to those in place, current ROE is a good measure of expectations. To get an accurate measure: Dividends + Share Repurchases - New Equity Issued Earnings b) From historical growth rates of earnings, dividends, EPS or DPS All of the above factors can be found on FA along with a CAGR calculation

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* Free Cash Flow Approach: Solves many problems due to choice of accounting alternatives. The idea is to separate the required cash payments from what is left for the contributors of capital. It is available on Bloomberg on CH6 and FA, as well as RV and is equal to: Net Operating Income - Replacement of Depreciated Assets-New Investment = Free Cash Flow FCF(1+g)/WACC-g)