# Study Session 9: Equity Valuation: Valuation Concepts

## payout ratio

A textbook I’m reading on said

the payout ratio in stable growth has to be consistent: payout ratio = g/ROE

did the text book make a mistake? Isn’t g/ROE = retention rate?

does that mean in stable growth, retention rate = payout ratio = g/ROE?

## risk free rate

Hi guys - is there any rule of thumb I should know for choosing the risk free rate? I always assumed it was the long-term government bond yield but just had a topic test question then where you could choose between LT and short-term government bond yield for Fama French, and the answer was the short-term gov. bond yield with one of the incorrect options using the LT rate.

Feeling disconcerted at getting such a simple question wrong this late in the piece!

Any suggestions?

Thanks

## Negative Minority Interests

HI,

A company pretend to do the account consolidation using the equity method (sum line by line). She have a 80% participation on a company that have negative equity (-800.000 EUR).

How should be the minority interests demonstrate in the consolidated accounts?

A) Equity (20%) Debit of 160.000 EUR (negative minority interests)? How should we interpret this negative value?

B) No recognition of these minority interests, placing the entire -800.000 in equity other variations?

Ty for your repplies;)

## PVGO

Hi everyone,

I am struggling a bit with the computation of PVGO. I have seen 3 different approaches so far and I am trying to reconcile them:

1) V0=E1/r+PVGO (this is the formula I am familiar with)

2) V0=D1/r+PVGO (from one of Schweser Mocks)

3) Compute the difference between 1) and 2), from one of the CFAI Topic Tests.

## Equity TT - Green Snake, can anyone enlighten me on the implied LT div growth rate?

Hi everyone. I am kinda stuck on number 4 on the Equtiy TT(Green Snakes). Can anyone help me?

I simply cannot understand how the answer equation is derived to be ’ g = (r - g )/1 + d ‘.

Maybe my algorithm is wrong but my understanding is…

1. V0 = D0(1+g)/(r-g)

2. V0(r-g) = D0(1+g)

3. (r-g) = D0(1+g)/Vo

4. g = r - Do(1+g)/Vo

Thanks for your kind attention!

## Justified P/B

Does anyone know if the equation for the justified price-to-book ratio can be reconstituted using ROIC and WACC instead of ROE and the cost of equity in order to come up with a justified EV/Assets Ratio (or some variation of that)? My intuition says yes, but I wanted to hear from someone more experienced.

This question doesn’t have as much to do with the curriculum as it does in just helping me with my own conceptual knowledge.

## Equity - Bryan Yee

Q4. Why is this not solved as Multi - stage RI?

## Mock Am Q31 and 32

Why in Question 31 in Gordon Growth Model do we add the Small Firm Premium **only** and why in question 32 using macroeconomic Model we add Risk premia for **both** small firm and thin trading?

## Test Topic- Equity- McKinley

Regarding question 4. Isn’t core EPS have already made all necessary adjustments for non recurring item. But why is the answer showing otherwise.

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