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Hi,
I am self-studying have been reviewing the Pilot paper Fly 4000.
Please can you help me understand how to calculate the growth rate using r x b calculation? I’m not sure how they get the answers for b or r to get 6.322 growth rate for year 1.I fear I would fail a question based on section d in the syllabus if I cannot work this out.
Please help.
Many Thanks
For growth model, it require retention ratio, b that can be derived from cashflow statement. The free cashflow to equity before reinvestment is defined as operating cashflow less interest and tax
FCFE before reinvestment = 210 + 1,5 – 4.1 = 207.4
g = b x re
b = Reinvestment – Capital expenditure / FCFE before reinvestment = 120 / 207.4 = 0.58
r = Ke = 10.9%
Hence g = 10.9% X 0.58 = 6.322%
Hope it helps.
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