Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE).She asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share.Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter.Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis:

Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV.She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek.What is the value of rs?

Question

Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE).She asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share.Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter.Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis:

Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV.She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs.The value of rs that causes the calculated price to equal the actual price is the correct one.She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek.What is the value of rs?

Quizplus · Accepted Answer

Finding the discount rate when we know the dividends and the actual stock price is complicated if the growth rate is not constant, and an iterative solution is required. 11ea1b84_8ba6_3527_a54a_f34ffc726b7a_TB3581_00 
Calculated Price = P? = Sum of PVs = $15.00
 11ea1b84_8ba6_3528_a54a_8b5796676d46_TB3581_00

Julia Saunders Is Your Boss and the Treasurer of Foster