A Fundamental Approach

Firm Foundation theorists use the fundamental approach to determine the intrinsic value discussed earlier. They look at several main determinants in their analysis of stock prices and future dividends.

Determinant 1: The Expected Growth Rate

In order to unuderstand Growth Rate one must understand how Compound Interest works:

If Jean-Paul invests a Principal, P, of $1.00 at a growth rate, r, of 5%

Present Dividend = $1.00 Dividend in n years = P(1 + r)^n

Thus we can draw following Table:

 Growth Rate     Present    Dividend in 	Dividend in     of Dividends of       Dividends                     5 Years      10 Years 

5 % $1.00 $1.28 $1.68 $3.39 10% $1.00 $2.01 $4.05 $32.92 25% $1.00 $3.05 $9.31 $264.70 Dividend in 25 Years