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| Line 3: |
Line 3: |
| *[[Determinant 1: The Expected Growth Rate]] | | *[[Determinant 1: The Expected Growth Rate]] |
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| In order to unuderstand Growth Rate one must understand how Compound Interest works:
| | *[[Determinant 2: The Expected Dividend Payout]] |
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| If Jean-Paul invests a Principal, P, of $1.00
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| at a growth rate, r, of 5%
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| Present Dividend = $1.00
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| Dividend in n years = P(1 + r)^n
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| Thus we can draw following Table:
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| ----
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| <b>
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| Growth Rate Present Dividend Dividend in 5 yrs Dividend in 10 yrs Dividend in 25 yrs
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| </b>
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| 5 % $1.00 $1.28 $1.68 $3.39
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| 10% $1.00 $2.01 $4.05 $32.92
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| 25% $1.00 $3.05 $9.31 $264.70
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| ----
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| Malkiel notes that many newly established coporations perish early. The ones that survive rapidly grow, mature, and then experience a period of stability. However, since it becomes increasingly difficult to sustain growth rates over time, many companies eventually ‘die out.’
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| Finally, Malkiel gives his First Rule, '''Rule 1''':
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| ''"A rational investor should be willing to pay a higher price for a share, the larger the growth rate of dividends."''
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| His '''Corollary''' to Rule 1:
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| ''"A rational investor should be willing to pay a higher price for a share the longer the growth rate is expected to last."''
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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.
