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Dear Sir
I am referring to this question:
For calculation of sustainable growth rate, why does the solution use the required rate of return calculated from CAPM (highlighted in yellow) rather than Return on Equity that can be calculated from the info highlighted in blue?
Thank you.
Please do not link to ACCA questions – they are copyright of the ACCA and they do not allow them to be linked elsewhere. (I have copies of all past exam questions so you just need to give the name of the question and the date 🙂 )
This is not financial accounts, and for financial management the return on equity is the shareholders required rate of return. It is the future expected dividends discounted at the shareholders required rate of return that gives the market value of the shares.
You cannot use the information in blue to determine is because free cash flow to equity is not expected future dividends and figures on the SOFP are book values and not the market value.
I do suggest that you watch my free lectures on this.
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