Mercury training June 2008

I assume that you are referring to part (b) of the question, in which case the calculations have used the dividend growth rate as calculated using Gordon's growth approximation. However, the question asks for advice as to the range of likely issue prices, and therefore the written parts of the answer are more important than the calculations anyway.

it says choice is to be made between, historic earnings growth is 12% then it gives an average revenue growth rate of 5.33% finally the growth rate we have calculated using g=br which is 7.26% i understand why we choose the rate that we do. I am having confusion in this model; Do(1+g)/ke-g the growth rate used is earnings growth rate as i have mentioned above. Is this always the case? 0.25(1.0726)/0.096-0.0726 thanks

Sorry but I do not understand you. The growth rate used is 7.26%, which is the dividend growth rate as given by the formula g = rb.

Oh. Ok thanks. A bit of conceptual problem now resolved.

You are welcome :-)