given that a firm pays dividens 0.72 Euros per share for the current year and dividends are expected to grow over the next 10years beginning at a high rate of 12% initially but declining linearly to a lower sustainable rate of 5% and remaining at that rate thereafter. if the present value is 30.55 Euros, what is the discount rate?

Question

anonymous · Answer

need to solve the following equation for "r". $$30.55 =\sum_{0}^{10} (0.72)(1.12)^{t}/(1+r)^{t} + (0.72)(1.05)/(r-0.05)$$
should be straightforward with a financial calculator with time value of money functions (annuity and perpetuity) or spreadsheet. note that in the summation, be careful if we are talking about receiving the first dividend immediately or a year from now. That will change the indexes. For a good understanding of how the second term is derived check out the "Gordon Growth Model"