Rosato extends her analysis to consider the possibility that ROE will slowly decay toward r in 2033 and beyond, rather than using a perpetuity of Year 2032 residual income.

Rosato estimates a persistence parameter of 0.60. The present value of the terminal value is determined as

with T equal to 21 and 2033 residual income equal to 26.7304 (23.8664 × 1.12), in which the 1.12 growth factor reflects a 12 percent growth rate calculated as the retention ratio times ROE , or (0.60)(20%) = 0.12.

Total value is TWD91.74 calculated by adding the present value of the terminal value, TWD5.33, to TWD86.41. Rosato concludes that if Taiwan Semiconductor’s residual income does not persist at a stable level past 2032 and deteriorates through time, the shares are modestly overvalued at a price of TWD95.6.

Transcribed Image Text:

ET-rBT-1 (1+r-w)(1+r)