The average stock return of BBP PLC in the last ten years is 8.2%. At the end of 2020, the companys (current) dividend yield D0/P0 = 2.0%. Goldman Sachs, a leading global

investment bank, predicts the companys dividend growth rates for the next five years are as follows:

2021 2022 2023 2024 2025

2.5% 5.2% 4.5% 4.3% 4.1%

REQUIRED:

a. Estimate the expected rate of return from investing in BBP, assuming the rate of dividend growth reverts to its long-run average of 4.0% per annum after 2025.

(25 marks)

b. Interpret your results. Assume that the historical average return of 8.2% is a good benchmark.

(30 marks)

c. Estimate the expected long-run dividend growth rate if an investor expects to earn the average historic return of 8.2%.

(25 marks)

d. Explain the difference between dividends and free cash flows attributable to equity holders (FCFE)