Ok, here goes. This is a copy and paste job. Some of the Greek does not transfer prettily.
Regardless, there is so much volatility and uncertainty here that I think this is just one useful reference point, and to use it as the basis for a decision is foolish. If anything, the fact that Sandisk was able to raise half a billion with only 10% or so dilution speaks volumes about the company and its prospects. 2003 was no bubble year, and Sandisk is no Pets.com.
Cost of equity (Ke)
Risk premium
Ke = Kd + ñ
Kd = 0.0335
ñ = 0.0386 (from Damodaran, implied market premium, arithmetic average, 2001-2002)
Ke = 0.0335 + 0.0386 =
Ke = 0.0721, or 7.21%
Dividend growth
Ke = DIVo(1+g)/Po + g
Sandisk does not issue a dividend, so
Ke = g
g for Sandisk is estimated at 21% for the next five years by market analysts
g; the forward-looking growth estimate in earnings of 21% (by market analysts) seems
reasonable; growth in income has also been approximately 20%);
(for reference, the growth in cashflow has been 62.6%, compounded, from 1998-2002)
Ke = 0.21 or 21%
CAPM
KE = krf + â(km – krf)
krf = 0.013 (T-bill rate from WSJ)
km = 0.0688 (5 year average return of Russell 2000 through 29 September 2003)
â = 2.31 (calculated with Sandisk returns & Russell 2000 returns, Sep 98 - Sep 03)
(for comparison purposes, Yahoo! Finance â = 3.36, Multex â = 3.4)
so
KE = 0.013 + 2.31*(0.0688 – 0.013)
KE = 0.1419, or 14.2%
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