PRINCIPLES OF CORPORATE FINANCE

6th Edition
RICHARD A. BREALEY AND STEWART C. MYERS

Chapter 5
Why Net Present Value Leads to Better
Investment Decisions than Other Criteria
 This spreadsheet demonstrates how estimates of the cost of equity that are derived from the
constant growth DCF model" can be inconsistent with the actual cost of equity implied by a
firm's stock value, particularly when the year-to-year dividend growth pattern varies.

There are two exercises in this spreadsheet:

I. Solve for r, the required return, (also known as the cost of equity or market capitalization
rate) by finding the discount rate that equates the present value of future dividends to
today's $50 stock price

II. Demonstrate the shortcomings of the "constant growth DCF model" as an estimate of the
required rate.

Go to Exercise I, "Solve".
 PV of Dividends Sensivity to Required Rate

$100.00
$80.00
PV of Dividends

$60.00
$40.00
$20.00
$0.00
5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Required Rate
 PV of Dividends Sensivity to Required Rate

$100.00
$80.00
PV of Dividends

$60.00
$40.00
$20.00
$0.00
5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Required Rate