Hi Daniel,

There doesn’t seem to be any obvious error in your calculation. The reason for the low min PB value to exceed required returns is because of the low quartile 1 ROE. You may have noticed that the lower the ROE of a company, the lower the price I would be willing to pay for it. This is consistent with how you would value the quality of the business.

Q1) How do we calculate the retention rate of the dividend payout is more then the nett income like GAB and Dutch Lady.

Q2) How do we then calculate the growth rate when the dividend payout is more then the nett income.

The reason we calculate the retention rate is to estimate the growth of the company. So the answer to Q2 is more relevant and has been answered before. Please see the link below:

Q3) Is there a rule of thumb of the growth rate calculation, from the video you use 10%. Does it relate to the quartile 1 ROE?

I typically estimate the growth rate using the Quartile 1 ROE x Retention rate. This means that the growth rate of the company is estimated by the percentage of its earnings that it retains in the business (not paid out as dividends). However, there are cases where this calculation will result in a growth rate that far exceeds 10%. This is not sustainable in the long term for almost any business. As such, I use a more conservative assumption of 10% growth. However, it’s also subject to a case by case basis, and in some instances, I might do a 2-step valuation (higher growth for the 1st few years, followed by a more normalised growth to perpetuity).

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