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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.