Justin Owens is an analyst for an equity mutual fund thatinvests in British stocks. At the beginning of 2008, Owens isexamining domestic stocks for possible inclusion in the fund. Oneof the stocks that he is analyzing is British Sky BroadcastingGroup (London Stock Exchange: BSY). The stock has paid dividendsper share of £9, £12.20, and £15.50 at the end of 2005, 2006, and2007, respectively. The consensus forecast by analysts is that thestock will pay a dividend per share of £18.66 at the end of 2008(based on 19 analysts) and £20.20 at the end of 2009 (based on 17analysts). Owens has estimated that the required rate of return onthe stock is 11 percent.
A. Compare the compound annual growth rate in dividends from2005 to 2007 inclusive (i.e., from a beginning level of £9 to anending level of £15.50) with the consensus predicted compoundannual growth rate in dividends from 2007 to 2009, inclusive.
B. Owens believes that BSY has matured such that the dividendgrowth rate will be constant going forward at half the consensuscompound annual growth rate from 2007 to 2009, inclusive, computedin Part A. Using the growth rate forecast of Owens as the constantgrowth rate from 2007 onwards, estimate the value of the stock asof the end of 2007 given an 11 percent required rate of return onequity.
C. State the relationship between estimated value and r andestimated value and g
