Implied Growth Rate
Our value for Con Ed is different from the market price and this is likely to be the
case with almost any company that you value. There are three possible explanations for this
deviation. One is that you are right and the market is wrong. While this may be the correct
explanation, you should probably make sure that the other two explanations do not hold –
that the market is right and you are wrong or that the difference is too small to draw any
conclusions. [
To examine the magnitude of the difference between the market price and your
estimate of value, you can hold the other variables constant and change the growth rate in
your valuation until the value converges on the price. Figure 13.2 estimates value as a
function of the expected growth rate (assuming a beta of 0.90 and current dividends per
share of $2.19).