# Study Session 9: Equity Valuation: Valuation Concepts

## Long term rates in return concept

For Historical and forward looking estimates do we always use long term bond yields?

## a quick question about the DDM

I have a quick question about the DDM dividend discount model.

Do we need to assume that the capital gain growth rate is the same as the dividend growth rate? and why ?

## Does an increase in EPS after share buyback increase shareholder wealth?

Hi guys,

Does an increase in EPS after share buyback increase shareholder wealth? The study text says it does not.

How can this be? Doesn’t each share yield more earnings?

Regards,

Sharad

## Equity: adding consensus growth rate to dividend yield

Came across a practice problem. The solution provided adds consensus growth rate to dividend yield to arrive returns…..

div yield=3%

consensus growth=5.9%

Ke=3%+5.9%=8.9%

why is it not 3%*(1+5.9%)

## CAPM for stock traded in more than one market

I have been reading equity valuation recently and find out that the weakness of CAPM are low explanatory power and more than one required return if stock is traded in more than one market.

The question is do we have a better model that solve this problem or we just have to calculate more than on required return in practice.

thanks :)

## Holding Period Return

In the CFAI text, it shows HPR with two formulas:

r = Dividend Yield + Price Appreciation, [(Div + Price_{1})/Price_{0}] - 1

Then it restates that it could be thought of as

E(r) = required return + convergence of price to value, such that E(r) = r + [(V_{0}-P_{0})/P_{0}], where V_{0} is the intrinsic value

I understand the first formula, but the second formula is tripping me up as we’re adding the required return on top of the original HPR formula…

## FCFE when paying back debt

Hey Guys,

Just hammering out small details and found some inconsistencies in my notes

FCFE in the year you pay back debt, is it higher or lower?

I feel like it would be lower in the year you pay back debt (due to negative net borrowing) and then increase in the years after, due to the fact that you have lower interest cost but what happens to my net borrowing? Is it now lower offsetting any of the saving from the lower interest payment?

Any help would be appreciated

## Risk Free Rate for Multi Factor Models vs Build Up Models

Is my understanding correct? Below is what I’m seeing on mocks. I think knowing this concept will be good for a point or two on the exam.

Multi-Factor Models (have Betas): Use Short-Term Risk Free Rate

Build Up Models (No Betas): Use Long-term Risk Free Rate

## Ibbotsen Chen Equity risk premium

Hey guys,

A little help here

For the Ibbotsen Chen model [(1+inflation)x(1+RealGDPGrowth)x(1+Changes in PE)-1] +Yield of Market

Am I subtracting the risk free rate at the end?

Granted, almost all my notes say to do so…. But then I came across notes from my TT’S and CFAI mocks that say not to include it. Now I’m confused.

Which one is right? Is there a situation where I would include it and one where I wont?

Thanks for the help

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