Hi, I’m currently reading Value.able and I’m unsure of a concept you discuss. I would really appreciate it if you could help me out.
In table 6.1 you show that a company would be better by paying out all profits as dividends instead of retaining the earnings and reinvesting it in the business when ROE is low (5% in your example). I would have thought if the retained earnings from year 1 is invested in year 2 at year 1′s ROE then the market cap will increase by the present value of year 1′s profit (50,000 x 1.05)? Basically I think that the market cap is independent of the payout ratio assuming the ROE remains constant, therefore in your table I think the P/E ratio in year two will increase as the debt/equity ratio is reduced and the earnings are now less risky.
Really enjoying the book!.
Notify me of followup comments via e-mail. You can also subscribe without commenting.
Australia's beststock marketanalytics tool
Demonstrating thatmarket-beating returnsare possible
Investment ManagementPty Limited