Miranda Mendosa Case Scenario

need_pass · June 2, 2018, 4:58am

Is there something wrong with the answer to Q3?

Where do they get r as 24%?

Solution

C is correct. Using the H-model:

V₀=D₀(1+g_L)+D₀H(g_S−g_L)r−g_LV₀=D₀(1+g_L)+D₀H(g_S−g_L)r−g_L

D₀ = $5.33 × 0.60 = $3.20

H = half of the life of high-growth period = 10/2 = 5 years

V₀ = ($3.20×1.04)+[$3.20×5×(0.15−0.04)]0.24−0.40($3.20×1.04)+[$3.20×5×(0.15−0.04)]0.24−0.40 = $3.33+$1.760.084$3.33+$1.760.084 = $60.60

Drockk93 · June 2, 2018, 11:51am

There’s a way you can calculate r using the H model but I usually just reverse engineer it.

Harrogath · June 2, 2018, 6:28pm

You can also use trial and error. Remember you only have 3 options. 1 may be discarded by simple logic.