Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,
 
Dean wrote:
>Snoopy wrote:
>  
>>'re'='rf'+ (beta)( E(rm)-'rf' )
>>
>>Where 'rf' is the risk free rate of return, and
>>E(rm) is the expected rate of market return.
> 
>I added market risk premium to the rfr to get the expected return for
>the market of 13.37%
> 
>>Again using your figures Dean I get
>>
>> = 5.87%+ (0.84)( 7.5% - 5.87% )= 7.24%.
> 
>I get = 5.87 + (0.84)(13.37-5.87)  = 12.17%
>
>Don't you think your expected return for the market is a little low?
>

I have an old copy of 'Making Money on the NZ Sharemarket' by Frank 
Newman.   In Table 1 of appendix 3 there is a table of annual 
compounded rates of returnof the NZSE Gross Index with dividends 
reinvested.     If we start from 1988 (to leave out the 1987 silliness, and 
all the high inflation in times before that)  the average returns were

 6.9%, 8.39%, 7.38%, 14.49%, 12.35%, 12.17%, 5.6%, 8.98%, 5.65%, 
-0.24% and 1.86%.     

That makes an average return of 8.35% over a ten year period.    I 
don't have the exact figures for the years 1999 and beyond but I think 
you will find the average return figure has not greatly changed.

As a consequence I think you need to reassess whether using a figure 
some 5 percentage points higher than the 15 year trend figure is going 
to give you realistic results.

Neverthless I think you are right in that 7.24% for expected average 
market returns is a liitle low if earnings are compounded.    If I rework 
my figures using 8.35% I get:

= 5.87%+ (0.84)(8.35% - 5.87%)= 7.95%.

If I take this years core dividend of 2.5c + 6c= 8.5c as my starting 
point, then using the DDM model I get one WRI share to be worth:

= 8.5c/( 0.0795-0.0218 ) = $1.47


> 
> > If I take this years core dividend of 2.5c + 6c= 8.5c as my starting
>   Are you able
> > to reconcile your result with my calculation?
> 
> I used 11.5c
>

That figure was based on earnings at the peak of the commodity cycle, 
so I think it is a less realistic base figure than 8.5c that has already 
been forecast as the dividend by WRI management for this year.

>
> And my growth rate was 2.42%
> 

Not too different to mine and, perhaps if the financing side of the 
business takes off, not unrealistic.  If I use your growth figure, then I 
get:

=8.5c/( 0.0795-0.0242 ) = $1.54

Both the figures $1.47 and $1.54 are surprisingly close to Norgates 
$1.50 bid.     That suggests to me that Norgate is not paying for any 
share price appreciation of WRI if he gets the reigns of control.   A  
tacit admission that he can't do better than the current management?

SNOOPY

--
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on Pegasus Mail version 4.02
----------------------------------
"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


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