2. Through trial and error, one ends up using 18 percent and 19 percent as discount rates.

Present Present End of Year Dividend per Share Value at 18% Value at 19%

- - - -

Present value, 1-5 years = -$5.26 $5.13 =

Year 6 dividend = $2.49(1.10) = $2.74 Market prices at the end of year 5 using a perpetual growth dividend valuation model:

238 Part II Investment in Assets and Requived Returns Present value at time 0 for amounts received at end of year 5:

$34.25 at 18% = $14.97 $30.44 at 19% = $12.76 18% 19%

Present value of 1-5 years $ 5.26 $ 5.13 Present value of 6-rn years -14.97 -12.76 Present value of all dividends $20.23 $17.89 Therefore, the discount rate is closer to 18 percent than it is to 19 percent.

Interpolating and this is the estimated return on equity that the market requires.