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In example 6, Why is it that while using the Market value formula, the growth rate is different to using the ‘rb’ growth method.
i.e. Po= 2.80, Do= 0.20, g is unknown, Re= 0.18
2.80 = 0.20 (1-g)
————— , the value for g is 10.13% whereas rb gives you a vale of 6.75%.
Could you please let me know where I’m going wrong here?
Thank you very much.
Just because the rate of return on reinvestment is 18%, it does not mean that the shareholders required rate of return is 18%.
I work through this example in my free lectures on this chapter (and there is obviously no point at all in using the lecture notes without watching the lectures).