fm10 9 - that rate. Finally, we could use the analysts'...

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DCE: The company seems to be in a rapid, nonconstant growth situation, but we do not have the inputs necessary to develop a nonconstant r s . Therefore, we will use the constant growth model but temper our growth rate; that is, think of it as a long-term average g that may well be higher in the immediate than in the more distant future. Data exist that would permit us to calculate historic growth rates, but problems would clearly arise, because the growth rate has been variable and also because g EPS g DPS . For the problem at hand, we would simply disregard historic growth rates, except for a discussion about calculating them as an exercise. We could use as a growth estimator this method: g = b(r) = 0.5(24%) = 12%. It would not be appropriate to base g on the 30% ROE, because investors do not expect
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Unformatted text preview: that rate. Finally, we could use the analysts' forecasted g range, 10 to 15 percent. The dividend yield is D 1 /P . Assuming g = 12%, 1 P D = 20 $ ) 12 . 1 ( 1 $ = 5.6%. One could look at a range of yields, based on P in the range of $17 to $23, but because we believe in efficient markets, we would use P = $20. Thus, the DCF model suggests a r s in the range of 15.6 to 20.6 percent: Highest: r s = 5.6% + 15% = 20.6%. Lowest: r s = 5.6% + 10% = 15.6%. Midpoint: r s = 5.6% + 12.5% = 18.1%. Generalized risk premium . Highest: r s = 12% + 6% = 18%. Lowest: r s = 12% + 4% = 16%. Midpoint: r s = 12% + 5% = 17%. Based on the three midpoint estimates, we have r s in this range: CAPM 17.5% DCF 18.1% Risk Premium 17.0% Answers and Solutions: 10 - 9...
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