H-Model to find the r

It appears that I can use the H-Model to solve for “r”, as long as I leave out the “t/2” in the second numerator. Am I correct to assume such?

This is the one-step model. I think the H model only applies if there is more than one change in the growth rate. Plus I have no idea where “t/2” is in the problem. :man_shrugging:

Now this is a bit of an ugly PV expression, but there is a wonderfully simple way of solving this. Use the CF worksheet and start with choice B (@s2000magician :slightly_smiling_face:) of 9%.

C01 = yr 1 dividend = 2.14
F01 = 1
C02 = yr 2 dividend + terminal value assuming 9% = 2.2898 + 60.10725 = 62.39705
F02 = 1

Using the NPV worksheet, set I=9 and CPT NPV -0.01835, which is prettty darned close to 0, implying 9% works! Or you could use the IRR worksheet to solve for the IRR (8.98131%), which is pretty darned close to 9%

Ya know, this would make a veeeeeery interesting exam question!!! :thinking:

1 Like

Perfect. I never thought to simply apply one of the answer options into the I function of NPV.