banni i think it only makes sense for you to keep money in the company if you have growth/investment opportunity which is not always the case.
that is what I think too if a company keeps a low payout rate for a few years it can develop high growth rates at one point after the money kept in the business have some effect and therefore increase their p/e
i think i’m good here now- i was just thinking denominator also- not numerator effect.
mwvt9 Wrote: ------------------------------------------------------- > kabhii Wrote: > -------------------------------------------------- > ----- > > D? > > > > A - Required return is low, so value is high > > B - Growth is high, so value is high > > C - Numerator is high due to high payout. > > D - Numerator is low due to low payout. > > This must be what is messing me up. I was keeping > the D constant in my analysis, but both the > numerator and denominator change with a change in > dividend payments. > > It appears that the numerator effect outweights > the denominator. It still seems like the denominator effect would be more than a change in the numerator. Small changes in g and r have large effects on values…
But only a fraction of g is determined by the payout ratio.
It still seems like the denominator effect would be more than a change in the numerator. Small changes in g and r have large effects on values… I think you are right. I don’t know why the anwer is D then.
I’ll have to research further tomorrow. Can’t find anything about it in schweser or CFA at the moment. Going to have to do a spreadsheet example and change the variables to see what happens.
Dwight Wrote: ------------------------------------------------------- > I’ll have to research further tomorrow. Can’t > find anything about it in schweser or CFA at the > moment. Going to have to do a spreadsheet example > and change the variables to see what happens. Did that if ROE >= RR in the stable phase then: Earnings 5 ROE 12% RR 11% Payout RR Growth Dividend Value 10% 90% 10.800% 0.5 250 20% 80% 9.600% 1 71.42857143 30% 70% 8.400% 1.5 57.69230769 40% 60% 7.200% 2 52.63157895 50% 50% 6.000% 2.5 50 60% 40% 4.800% 3 48.38709677 70% 30% 3.600% 3.5 47.2972973 80% 20% 2.400% 4 46.51162791 90% 10% 1.200% 4.5 45.91836735 99% 1% 0.120% 4.95 45.49632353 So, I believe in this case anser would be C. If ROE < R then Earnings 5 ROE 12% RR 13% Payout RR Growth Dividend Value 10% 90% 10.800% 0.5 22.72727273 20% 80% 9.600% 1 29.41176471 30% 70% 8.400% 1.5 32.60869565 40% 60% 7.200% 2 34.48275862 50% 50% 6.000% 2.5 35.71428571 60% 40% 4.800% 3 36.58536585 70% 30% 3.600% 3.5 37.23404255 80% 20% 2.400% 4 37.73584906 90% 10% 1.200% 4.5 38.13559322 99% 1% 0.120% 4.95 38.43167702 In this case answer would be D. So I guess both C and D seems to be correct. But do we need to keep other variables constant while we change one variable? May be.
Ugh this is pretty brutal. Good analysis though. I guess we just have to memorize it. If an analyst gets an extremely low value using two-stage DDM, it is most likely that the stable period payout ratio is too low or the beta in the stable growth period is too high. If an analyst gets an extremely low value using two-stage DDM, it is most likely that the stable period payout ratio is too low or the beta in the stable growth period is too high. If an analyst gets an extremely low value using two-stage DDM, it is most likely that the stable period payout ratio is too low or the beta in the stable growth period is too high.
maybe they just expect us not to speculate on ROE they don’t say if roe is low or high…
d made sense to me. I’d go into it, but a) I’m on my phone so typing is hard and b) I don’t want to risk overthinking it. Basically I think they are assumng all other imputs held constant and that values in the constant growth period such as growth and roe lie close to those of the market.