Required rate of return=growth rate? CBOK Reading 30 practise question 41 (2018 edition)

CFA Level II Equities
#1

Hi,

For the question on Venus company, in particular question 41 of CBOK

Exhibit 2, scenario 2 shows the growth rate of dividends; but the question does not explicitly state the required rate of return that would be required to calculate the terminal value. In the answer, the terminal value is calculated using 8% which is the beginning growth rate.

Is the beginning growth rate = to the required rate of return?

Thanks,

#2

Nope, you may be forgetting some data. Perhaps you have to calculate the required rate of return in first place. Double check it or write the question here!

#3

https://www.cfainstitute.org/Eratta/2018_level_II_errata.pdf

“In the information for Practice Problems 37-46 (p. 261 of print), the required rate of return for Venus Company is 8%.”

#4

I have to agree with the first post. that sentence is not written in the question. this is the text and question as copied and pasted.

Venus Company

Withers has assembled the data on Venus Company in Exhibit 2. After analyzing competitive pressures and financial conditions in the industry, she predicts that Venus Company will lose market share because of new entrants, but will stabilize within a few years. Beginning with a per share dividend of USD 3.15 in 2017, she develops two scenarios regarding the growth of dividends of Venus Company. The scenarios are in Exhibit 2 and are summarized as follows:

  • In Scenario 1, the growth rate will fall in a linear manner over the years 2018 through 2021 from 8% to 4% . Using the H-model, she calculates a value of USD 58.79 per share of Venus Company stock.
  • In Scenario 2, the growth rate falls from 8% in 2017 to 6% in 2018 and 2019, to 5% in 2020 and 2021, and then to a sustainable rate of 3% for 2022 and beyond.
    Scenarios** Time Period **Rate Scenario 1 2018 through 2021 Declining linearly to 4% Beginning 2022 Remaining stable at 4% Scenario 2 2018 and 2019 6% 2020 and 2021 5% Beginning 2022 Remaining stable at 3%