Calculate the intrinsic value of Rio Tinto in each of the following scenarios by using the three-stage growth model of Spreadsheet 18.1 Treat each scenario independently. a. The terminal growth rate will be 10.30%. (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Intrinsic value $ 171.33 X b. Rio Tinto's actual beta is 1.05. (Round your answer to 2 decimal places.) > Answer is complete but not entirely correct. $ 141.48 X c. The market risk premium is 9.50%. (Round your answer to 2 decimal places.)
Calculate the intrinsic value of Rio Tinto in each of the following scenarios by using the three-stage growth model of Spreadsheet 18.1 Treat each scenario independently. a. The terminal growth rate will be 10.30%. (Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Intrinsic value $ 171.33 X b. Rio Tinto's actual beta is 1.05. (Round your answer to 2 decimal places.) > Answer is complete but not entirely correct. $ 141.48 X c. The market risk premium is 9.50%. (Round your answer to 2 decimal places.)
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 26SP
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Transcribed Image Text:### Dividend Valuation Model for GE
#### Assumptions and Inputs for GE
1. **Beta (β)**: 1.1
2. **Market Premium (mkt_prem)**: 0.08
3. **Risk-Free Rate (rf)**: 0.029
4. **Cost of Equity (k_equity)**: 0.1170
5. **Terminal Growth Rate (term_gwth)**: 0.094
These inputs are used to forecast dividends, calculate term value, and determine investor cash flow (CF).
#### Yearly Dividend Forecasts
| Year | Dividend | Dividend Growth | Term Value | Investor CF |
|------|----------|-----------------|------------|-------------|
| 2019 | 3.12 | | | 3.12 |
| 2020 | 3.38 | | | 3.38 |
| 2021 | 3.64 | | | 3.64 |
| 2022 | 3.90 | | | 3.90 |
| 2023 | 4.19 | 0.0740 | | 4.19 |
| 2024 | 4.51 | 0.0760 | | 4.51 |
| 2025 | 4.86 | 0.0780 | | 4.86 |
| 2026 | 5.25 | 0.0800 | | 5.25 |
| 2027 | 5.68 | 0.0820 | | 5.68 |
| 2028 | 6.15 | 0.0840 | | 6.15 |
| 2029 | 6.68 | 0.0860 | | 6.68 |
| 2030 | 7.27 | 0.0880 | | 7.27 |
| 2031 | 7.93 | 0.0900 | | 7.93 |
| 2032 | 8.66 | 0.0920 | | 8.66 |
| 2033 |
 **Answer is complete but not entirely correct.**
#### Scenario b: Actual Beta of 1.05
- **Instruction**: Round your answer to 2 decimal places.
- **Provided Answer**: $141.48
 **Answer is complete but not entirely correct.**
#### Scenario c: Market Risk Premium of 9.50%
- **Instruction**: Round your answer to 2 decimal places.
- **Provided Answer**: Not provided in the image.
Each of these scenarios represents different conditions under which the intrinsic value of Rio Tinto is computed. The errors indicate that while the provided answers are almost there, there are minor inaccuracies. Accurate intrinsic values are essential for making informed investment decisions.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2F1adceeca-8677-4506-9b12-4ec2445df983%2Fi84uafc_processed.png&w=3840&q=75)
Transcribed Image Text:### Intrinsic Value Calculation of Rio Tinto Using the Three-Stage Growth Model
To calculate the intrinsic value of Rio Tinto in each of the following scenarios, we use the three-stage growth model. Each scenario is treated independently. The intrinsic value results are detailed below.
#### Scenario a: Terminal Growth Rate of 10.30%
- **Instruction**: Round your answer to 2 decimal places.
- **Provided Answer**: $171.33
 **Answer is complete but not entirely correct.**
#### Scenario b: Actual Beta of 1.05
- **Instruction**: Round your answer to 2 decimal places.
- **Provided Answer**: $141.48
 **Answer is complete but not entirely correct.**
#### Scenario c: Market Risk Premium of 9.50%
- **Instruction**: Round your answer to 2 decimal places.
- **Provided Answer**: Not provided in the image.
Each of these scenarios represents different conditions under which the intrinsic value of Rio Tinto is computed. The errors indicate that while the provided answers are almost there, there are minor inaccuracies. Accurate intrinsic values are essential for making informed investment decisions.
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the first answer is still incorrect
 *Note: Replace with actual image link if needed.*
#### Scenario B: Rio Tinto’s Actual Beta is 1.05
In this case, Rio Tinto’s actual beta is considered to be 1.05. The answer for this scenario is correct and accurately reflects the intrinsic value.
- **Provided Answer:**
- **Intrinsic Value:** $143.64
- **Correct?**: ✓ (Answer is complete and correct)
 *Note: Replace with actual image link if needed.*
### Detailed Explanation:
In both scenarios above, the intrinsic values of Rio Tinto are calculated based on different assumptions:
1. **Scenario A** assumes a terminal growth rate of 10.30%, resulting in an intrinsic value calculation that is close but not perfect.
2. **Scenario B** assumes an actual beta of 1.05 for Rio Tinto, leading to a correct intrinsic value calculation.
Rounding and specific financial metrics (like growth rates and beta values) significantly impact the calculated intrinsic value. Understanding these nuances is essential for accurate financial modeling and investment analysis.](https://content.bartleby.com/qna-images/question/f1fd60a6-e122-44a6-b63f-53f11d7f8fb8/e1edbcc5-e75d-4463-99c6-2ce69e0faf40/vdcvysa_processed.png)
Transcribed Image Text:### Valuation of Rio Tinto Using the Three-Stage Growth Model
To evaluate the intrinsic value of Rio Tinto under different financial scenarios, we use the three-stage growth model outlined in Spreadsheet 18.1. Each scenario is considered independently.
#### Scenario A: Terminal Growth Rate of 10.30%
For this scenario, the terminal growth rate is set at 10.30%. The answer provided was close, but not entirely accurate.
- **Provided Answer:**
- **Intrinsic Value:** $175.20
- **Correct?**: ✗ (Answer is complete but not entirely correct)
 *Note: Replace with actual image link if needed.*
#### Scenario B: Rio Tinto’s Actual Beta is 1.05
In this case, Rio Tinto’s actual beta is considered to be 1.05. The answer for this scenario is correct and accurately reflects the intrinsic value.
- **Provided Answer:**
- **Intrinsic Value:** $143.64
- **Correct?**: ✓ (Answer is complete and correct)
 *Note: Replace with actual image link if needed.*
### Detailed Explanation:
In both scenarios above, the intrinsic values of Rio Tinto are calculated based on different assumptions:
1. **Scenario A** assumes a terminal growth rate of 10.30%, resulting in an intrinsic value calculation that is close but not perfect.
2. **Scenario B** assumes an actual beta of 1.05 for Rio Tinto, leading to a correct intrinsic value calculation.
Rounding and specific financial metrics (like growth rates and beta values) significantly impact the calculated intrinsic value. Understanding these nuances is essential for accurate financial modeling and investment analysis.
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