Now lets go back to the perpetual operation assumption. Also, imagine that I can grow my revenue and income 5% annually by expanding into BOWSA and YOWSA (blackberry and yucca flavors). What would be a fair % stake for Warren Buffet in this case assuming that we assume that the initial $20 million on advertising will allow us to launch the follow up flavors without additional ads. Hint for growth stocks the present value of dividends is equal to the initial dividend divided by the discount rate minus the growth rate. Hence, its Div1/(.10-.05) as opposed to Div1/.10 for the no growth valuation. This is a handy math fact that is not too hard to prove, so it's useful for valuing stocks that tend to grow (in the real world) But it does require assuming perpetual growth forever so valuation is harder practice (a mix of growth in the early life cycle of a company followed by steady dividends or slower growth or even declining profits after the mature phase) O None of these are accurate O PV of dividends is $80 million so Buffet would give me $20 million for a 25% stake O PV of divide3nds is $60 million so a 33% stake makes sense O PV of dividends is still $40 million so no change
Now lets go back to the perpetual operation assumption. Also, imagine that I can grow my revenue and income 5% annually by expanding into BOWSA and YOWSA (blackberry and yucca flavors). What would be a fair % stake for Warren Buffet in this case assuming that we assume that the initial $20 million on advertising will allow us to launch the follow up flavors without additional ads. Hint for growth stocks the present value of dividends is equal to the initial dividend divided by the discount rate minus the growth rate. Hence, its Div1/(.10-.05) as opposed to Div1/.10 for the no growth valuation. This is a handy math fact that is not too hard to prove, so it's useful for valuing stocks that tend to grow (in the real world) But it does require assuming perpetual growth forever so valuation is harder practice (a mix of growth in the early life cycle of a company followed by steady dividends or slower growth or even declining profits after the mature phase) O None of these are accurate O PV of dividends is $80 million so Buffet would give me $20 million for a 25% stake O PV of divide3nds is $60 million so a 33% stake makes sense O PV of dividends is still $40 million so no change
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Now lets go back to the perpetual operation assumption. Also, imagine that I can grow my revenue and income 5% annually by expanding into BOWSA and YOWSA
(blackberry and yucca flavors). What would be a fair % stake for Warren Buffet in this case assuming that we assume that the initial $20 million on advertising will allow us to
launch the follow up flavors without additional ads. Hint for growth stocks the present value of dividends is equal to the initial dividend divided by the discount rate minus
the growth rate. Hence, its Div1/(.10-.05) as opposed to Div1/.10 for the no growth valuation. This is a handy math fact that is not too hard to prove, so it's useful for valuing
stocks that tend to grow (in the real world) But it does require assuming perpetual growth forever so valuation is harder practice (a mix of growth in the early life cycle of a
company followed by steady dividends or slower growth or even declining profits after the mature phase)
O None of these are accurate
O PV of dividends is $80 million so Buffet would give me $20 million for a 25% stake
O PV of divide3nds is $60 million so a 33% stake makes sense
O PV of dividends is still $40 million so no change
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