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Hello John,
I am referring to the exercise Kulpar in the Revision Kit.
in this exercise the growth rate is found using current company valuation.
Would it be correct to find the growth rate alternatively through the formula g=k(e)b using the rate of reinvestment and cost of equity?
Using this alternative g=4.19%. Hence the valuation of company is slightly different, but the result is still the same (so that the existing capital structure gives the highest valuation).Thanks!
Usually, what you have done would be OK, but part (a) of the question was effectively telling you how they wanted you to calculate the growth rate (the bit below “recommend which capital structure should be selected”).
However, I don’t think you would have lost many marks (especially if you had stated your assumptions and you must always do).
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