Owing to this innovative process, KLT Food has been gaining substantial market share as

sales accelerate. The outlook for the company's future sales growth exceeds $17\%,$ and profit

margins are increasing well beyond the levels of competitors. Whitney expects that starting in

$2023,$ KLT Food's long$-$term dividend growth rate will be equal to the current level of

sustainable growth rate for the industry. She estimates that the industry average of the

required return on equity is $11\%$ and the industry average of the dividend yield is $3\mathrm{.}7\%.$

Whitney meets with the fund's chief investment officer, Cindy Smith, for her advice. Smith

states that since the packaged foods industry is mature and stable, she would prefer the

Gordon constant$-$growth dividend discount model for the valuation of KLT Food. Further,

Smith believes that the required return and dividend yield for the industry are stable and

should be used in the valuation of KLT Food. She makes another suggestion: "I believe

GRW Snacks Co$.$ would be a more attractive alternative to KLT Food. The company paid a

dividend of $$1\mathrm{.}48$ last year. Its earnings are growing about $2\%$ every year permanently. I

assign a required return of $7\mathrm{.}5\%$ for this company due to its low beta. It closed at $$20$

yesterday."

Required

a$.$ Given Cindy Smith's estimates and assumptions, what is GRW Snacks' intrinsic

value? $(4$ marks$)$

b$.$ Using the above information, can you estimate KLT Food's constant dividend growth

rate in the future years? $(4$ marks$)$