An analyst estimates that the next year's free cash flow to equity (FCFE) of Coca...
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An analyst estimates that the next year's free cash flow to equity (FCFE) of Coca Cola will be $10 and that FCFE will grow from next year at a constant rate of 4% (g). In addition, he estimates a required rate of return on equity (r) of 10%. If the analyst allows r and g to vary by 25 basis points (0.25%), which of the following combinations of r and g will give the highest value estimate for Coca Cola's shares?
A.When r = 10.25% and g = 3.75%
B.When r = 9.75% and g = 4.50%
C.When r = 10% and g = 4%
D.When r = 9.75% and g = 4.25%
Could you please explain why the answer is D which is from the tutorial? Thank you in advance
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