Q. Based on Exhibit 4 and Intern 1’s estimate of the required rate of return and the dividend growth rate for the first four years, the growth rate beyond the first four years consistent with the current price of USD52 is closest to:
- 3.80%.
- 4.17%.
- 4.23%.
Can somebody provide the detailed solution
Use trial & error method to solve for it
First estimate dividend for 4 years at 5% and the 4th dividend will be 2.431
Then take 4.17% as example
= 2.431*1.0417/.083-.0417 = 61.32 (Approx Terminal Value)
Then calculate the PV of all dividends including TV
The PV will be approx 51.98 (Close to 52)
So, 4.17% will be the answer
Hope you get it.