Franchise value 2011

badonkus

What is the intuitive reasoning behind the math (ROE-r)/(ROE*r) that is the franchise value?

Thanks



Edited 1 time(s). Last edit at Thursday, May 5, 2011 at 11:31PM by rockstar.

tobeornottobe

Franchise P0/E1 =FF*G ==> Franchise value, P0 = E1 * FF * G

(ROE-r)/ROE*r is Franchise factor. More intuitive way of looking at this is 1/r - 1/ROE. Higher ROE and lower r, i.e., higher performance combined with lower expected performance is the best scenario. All ROE above r contributes to Franchise value, returns above required rate. ROE=r implies no franchise value, perpetuity. ROE<r, under performance.

The equation simply says only when ROE > r you have growth or returns above required rate. If you have ROE<r then it pushes P0 down until ROE=r.