In the 2009 Economics question (Q5): 1) they asked to calculate the income return using Grinold-Kroner model, which is Dividend yield - change in shares outstanding. They gave the Div yeild as 4% and equity repurchase yield was -0.5%. Now 4% - (-0.5%) should be 4.5%, but they gave 3.5% as the answer (i.e. 4% - 0.5%). Does anyone know why? 2) In the same question, they asked to calculate the repricing return for which the equity compounded annual growth rate was taken as the required return on equity. Why?
My reply is a bit late, but I was looking into the Grinold Kroner model and found your question. In answer to your question 1: Income return = d1/p - % change in shares outstanding You were given the repurchase yield, which is - (% change in shares outstanding) So if the repurchase yield is -0.5%, it must mean that the change is shares was positive (ie shares were issued) and so (% change in shares outstanding) = 0.5% Therefore the income return = 4% - 0.5% = 3.5% Another way to write the income return is simply = dividend yield + repurchase yield
Im resurrecting this thread…any idea why the call the expected return the equity compounded annual growth rate ? equity compounded annual growth rate doesnt sound like a ror 2) In the same question, they asked to calculate the repricing return for which the equity compounded annual growth rate was taken as the required return on equity. Why?
The key word is “equity compounded…” a return on smth can be also interpreted as “growth rate”… Here is an example: net income of your company grew at 5% each year… this is the same to say that you had a 5% rate of return each year if you added NI to your Retained earnings account on your balance sheet yearly (ceteris paribus…)
The reasons to be cautious when we see Grinold-Kroner model in the exam… 1) It could create new term like “equity compounded annual growth rate” on the fly. 2) Using Historical Nominal Return with G-K model. …
Resurrectting this thread … Was doing the 2009 question and when looking for the dividend yield, it was under a “historical figures” exhibit. Now in the readings, the dividend yield in the GK model is the expected dividend yield, so you wouldn’t be using the historical dividend yield right? Like in the Gordon Growth model where you would use the next year’s dividend (and not the current or past dividend). The problem doesn’t give the growth rate of dividend (just the growth rate of equity).
My question is, for that problem would we be able to calculate an expected dividend yield rate?
I guess I’m trying to prevent them from tricking you into using an historical dividend rate instead of calculating the expected dividend yield as a test point (similar to them testing you if you remember to use the dividend (1+g) for the gordon growth model)