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To value ABC company in May 2021. we used a three-stage dividend discount model. partly because we expect the firm to maintain a growth rate higher than the economy for the next few years and partly because it has a history of paying substantial dividends. It has had a low debt ratio and has shown no indications that it plans to alter its approach to financing In 2020, the company reported earnings per share of $5.55 and paid out $1.88 per share in dividends. To estimate the expected growth rate, we assumed that the firm would be able to generate 5* as a return on equity on future investments, lower than its current return on equity but close to its marginal return on esity over the last few years. We also assumed that the form would reinvest about 33.810% of as earnings as dividends while this is lower than the existing retention ratio of 56.19%, it is consistent with the retention ratio that we estimated in Illustration 13.4 using the augmented dividends. Expected ROE for next 5 years - 35% Expected Retention Ratio for next 5 years - 38.40% Expected growth rate in EPS and DPS for next 5 years 35% 38.4 During this high growth phase, we will assume that the cost et equity for ABC will be 8.45%, estimated based upon a beta of 1.9. the U.S. treasury bond rate in 2021 of 555 and an equity rak premium of 5.6% (with the premium augmented to reflect ABC exposure in emerging markets). Content go to 1 and be a 2 To value ABC company in May 2021. we used a three-stage dividend discount model. partly because we expect the firm to maintain a growth rate higher than the economy for the next few years and partly because it has a history of paying substantial dividends. It has had a low debt ratio and has shown no indications that it plans to alter its approach to financing In 2020, the company reported earnings per share of $5.55 and paid out $1.88 per share in dividends. To estimate the expected growth rate, we assumed that the firm would be able to generate 5* as a return on equity on future investments, lower than its current return on equity but close to its marginal return on esity over the last few years. We also assumed that the form would reinvest about 33.810% of as earnings as dividends while this is lower than the existing retention ratio of 56.19%, it is consistent with the retention ratio that we estimated in Illustration 13.4 using the augmented dividends. Expected ROE for next 5 years - 35% Expected Retention Ratio for next 5 years - 38.40% Expected growth rate in EPS and DPS for next 5 years 35% 38.4 During this high growth phase, we will assume that the cost et equity for ABC will be 8.45%, estimated based upon a beta of 1.9. the U.S. treasury bond rate in 2021 of 555 and an equity rak premium of 5.6% (with the premium augmented to reflect ABC exposure in emerging markets). Content go to 1 and be a 2

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