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Chapter 17, example 6, calculating the rate of growth.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Chapter 17, example 6, calculating the rate of growth.

  • This topic has 1 reply, 2 voices, and was last updated 10 months ago by John Moffat.
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    Posts
  • March 8, 2022 at 6:07 pm #650284
    aishwarya1294@gmail.com
    Member
    • Topics: 1
    • Replies: 2
    • ☆

    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%.
    0.18 +g

    Could you please let me know where I’m going wrong here?
    Thank you very much.

    March 9, 2022 at 8:27 am #650389
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51543
    • ☆☆☆☆☆

    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).

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