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Your boss, Sally Maloney, treasurer of Fred Clark Enterprises ( FCE ) , asked you to help her estimate the intrinsic value of the company's

Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her
estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the
stock now sells for $10.00 per share. Sally asked a number of security analysts what they
believe FCE's future dividends will be, based on their analysis of the company. The consensus
is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a
rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to
estimate the required rate of return on the stock, r5, and she provided you with the following
template for use in the analysis.
The Calculated Price will equal the Actual Market Price
once the correct rs has been found.
Sally told you that the growth rates in the template were just put in as a trial, and that you
must replace them with the analysts' forecasted rates to get the correct forecasted dividends
and then the estimated HV. She also notes that the estimated value for r5, at the top of the
template, is also just a guess, and you must replace it with a value that will cause the
Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that,
after you have put in the correct dividends, you can manually calculate the price, using a
series of guesses as to the Estimated rs. The value of rs that causes the calculated price to
equal the actual price is the correct one. She notes, though, that this trial-and-error process is
quite tedious, and that the correct rs could be found much faster with a simple Excel model,
especially if you use Goal Seek. What is the value of rs?
20.46%
16.91%
13.02%
18.27%
14.88%
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