Reference no: EM133305597

Camille Sinaan is an analyst for an equity mutual fund that invests in British stocks. At the beginning of 2021, Camille is examining domestic stocks for possible inclusion in the fund. One of the stocks that she is analyzing is British Sky Broadcasting Group (London Stock Exchange: BSY). The stock has paid dividends per share of £ 9, £ 12.20, and £ 15.50 at the end of 2018, 2019, and 2020, respectively. The consensus forecast by analysts is that the stock will pay a dividend per share of £ 18.66 at the end of 2021 (based on 19 analysts) and £ 20.20 at the end of 2022 (based on 17 analysts). Camille has estimated that the required rate of return on the stock is 11 percent.

1. Compare the compound annual growth rate in dividends from 2018 to 2020 inclusive (i.e., from a beginning level of £ 9 to an ending level of £ 15.50) with the consensus predicted compound annual growth rate in dividends from 2020 to 2022, inclusive.

2. Camille believes that BSY has matured such that the dividend growth rate will be constant going forward at half the consensus compound annual growth rate from 2020 to 2022, inclusive, computed in part A. Using the growth rate forecast of Camille as the constant growth rate from 2020 onwards, estimate the value of the stock as of the end of 2020 given an 11 percent required rate of return on equity.

3. State the relationship between estimated value and r and estimated value and g.