SWM - Mark Moore

subtracting the normal earnings for each year by the cumulative dividend earnings. However,these now need to be discounted back to time zero to get the present value. The present valueis calculated by multiplying each year’s AEG with its corresponding present value factor. Thepresent value factor is one divided by one plus the cost of equity, raised to the time period,t(1/((1+Ke)^t)). By summing up each of the years present values it gives us the total PV ofyear-by-year AEG’s.Once the present value of the abnormal earnings growth is found, the terminal value ofthe perpetuity needs to be calculated. However, first we need to estimate the AEG for year2019. In order to calculate its AEG, the trend over the previous ten years should be considered.By calculating the percent change in AEG over the forecasted ten years, it gave us an estimateof what the AEG will be in 2019. For both as-state and restated AEG models, we calculated apercent change of 18%, which was added to 1 and multiplied by the previous year’s AEG to getthe AEG in 2019. Once the 2019 AEG is found, it must be converted into the present value. Inorder to do this we divide the forecasted AEG by the cost of equity minus the growth rate,followed by multiplying the perpetuity by the present value factor of 2018, resulting in theterminal value perpetuity.With the present value of the forecasted years AEG and the present value of theperpetuity, the intrinsic value per share can be found. The first step in the calculation of theintrinsic value, or the model price, is to find the total average net income. The figure iscomposed of the net income from 2009, the year-by-year present value of AEG and the value ofthe terminal perpetuity. Next the total average net income is divided by the number of sharesoutstanding to develop earnings per share. The intrinsic value per share must be computednext by dividing the cost of equity by the intrinsic value per share. In order to get the timeconsistent price in 11/2/2009 dollars, the previous share price must be multiplied by 1 plus theestimated cost of equity raised to the (10/12) power.173