AccessMyLibrary provides FREE access to millions of articles from top publications available through your library.
Like it or not, stock markets value the growth potential of all public companies every trading day. These days in particular, the share prices of many companies have a giant built-in growth premium, and should they fail to make good on the market's expectations, their shares are set for a tumble. If companies with small or negative growth expectations are to raise their share prices, they must prove that they are developing new revenue and profit streams.
Consultants in McKinsey's Australian office have documented the growth expectations built into the share prices of Australia's leading companies (exhibit). The value of current earnings, shown in the purple bar on the left, represents the net present value of earnings expected by analysts for the year 2000, in perpetuity, discounted at the relevant risk-adjusted cost of capital. The growth expectations depicted in the green bar on the right measure the difference between the market capitalization of a company on July 23, 1999, and the value of its current earnings stream, This reflects the market's view of the company's ability to create long-term value; the higher the premium, the greater the market's expectations for post-2000 earnings growth.
As the left side of the …