Question #107 - Reading 21 Free Cash Flow Valuation

Reading: Reading 21 Free Cash Flow Valuation

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Shared Context

- Assuming an ROE on 11.5%, which of the following is the best estimate of the sustainable growth rate for Busicomb Inc.? A) 10.1%. B) 8.7%. C) 11.5%.

Question

Which of the following is the most accurate estimate of the value of a share of Busicomb Inc.'s common stock using the H model variant of the dividend discount model (DDM)? Work to the nearest $ and assume the cost of equity is 12.3%.

Answer Choices:

A. $33 per share

B. $32 per share

C. $42 per share

Explanation

Cost of equity = Rf + β(Rm – Rf) = 4.5% + 1.3(6%) = 12.3% Using the H model: Dividend = 17.6m / 12m = $1.47 MV = $24.73 + $8.40 MV = $33.13

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