confidence builder if you can remember your formulas!

CFA Level II
#1

I just cheated and looked at my formulas to make sure, but I think I’ll remember it now after seeing this basic formula tested in at least 3 or 4 qbank questions: The required rate of return for an asset is often difficult to determine, but if we know the growth prospects and the current earnings of a firm we can determine the implied required rate of return from the: A) dividend rate. B) earnings retention rate. C) market price. D) sustainable growth rate.

#2

divident rate (payout rate?) = 1 - (RE/NI) RR = 1 - payout rate sustainable growth rate g = RR x ROE mkt price ?? = whatever you want to give me for the security what gives?

#3

C? Market Price = E/r-g ?

#4

hint: PVGO formula. the wording of “growth prospects” here i guess is a bit tricky. find the formula, question gets easy fast.

#5

ohhhhhhhh…that was a question. I though you were asking for us to define each. My B.

#6

I have not read yet but let me give it a try B? let me try if the formula is correct SGR=RR * ROE Can the ROE be used as an Implied required return. I was thinking about P = D1/r-g If we have the Dividend rate assuming A is the answer we will still need P.Also assuming B we will still need the D1 so will shoot for the B

#7

c - you only need the market price given the other info???

#8

Ooooooooooooooh…Bannista thanks for the hint.I was just beating about the bush. I have to take my time and read the ques carefully. V=E1/r +PVGO The answer is definitely C

#9

I think the only way to get r is by working the GGM, so you’d need c) market price

#10

except you don’t know the div in the question, so you may not be able to use the GGM…only the PVGO same answer though…C

#11

planner you’re right - PVGO it is. Getting the right answer for the wrong reason. It’s kind of like making a bank-shot - you didn’t plan it that way but you’ll still take the points.

#12

c is right

#13

I think that actually this is a great example of a question that, in fact, really does NOT require the formula to solve. This is easily answerable by just thinking about the question. None of the other answers tell us anything about the market – just more information about the firm. And the required rate of return is something that is EXTERNAL to the firm. Therefore it has to be C. You should be able to solve this even if you don’t know the formula for PVGO (like me) or even what it stands for.