Franchise PE

Summaries

Intrinsic P0/E1 = tangible P/E + Franchise P/E

=1/ r + (FF*G)

(equivalent to DDM)

1/r is just the ratio between PV of E1 ordinary annuity

FF = franchise factor = 1/r – 1/ROE

G = g/(r-g) where g=ROE * retention rate

P = E/r + PVGO (PV of growth opportunities)

Growth Duration Model

ln (High growth PE/ Constant growth PE)

= T (duration of high growth rate) x ln ((1+gH+dH)/(1+gc+dc))

gH = short term high growth rate

dH = dividend yield of high growth stock

(Assumption is the have similar systematic risk)

PEG = P/E divided by g(dividend growth rate)

(Between 1 and 2. lower: cheap, high – expensive)