ok i’ve been solving some questions in SchweserPro. I came across a question that asks for the high growth phase of a company given its market P/E. this is the solution: The market P/E of 35x on ValHealth implies a high growth phase of 6.4 years: Ln (35 / 22) = high growth phase × ln(1.15 / 1.07) 0.4643 = high growth phase × 0.0721 High growth phase = 0.4643 / 0.0721 = 6.4 years ok i don’t remember coming across “ln” anything in the equity material!!!
This looks like the growth duration model, and it is in the equity section. ln (PEhigh / PElow) = duration * ln (1+dhigh+ghigh / 1+dlow + glow) where d = dividend yield and g = growth
Schweser class notes say this formula is very unlikely to be tested. The key point to understand is that there is a formula that allows you to determine the length of the high growth phase give r, g, the normal growth, etc. Most likely a question on this would be very easy… Something like the analyst determines that the p/e implies ten years of high growth but he / she believes the company will only have super-normal growth for 7 years. Obviously the stock is overvalued then. Because the question can be answered without even knowing about this formula, it’s kind of a layup.
It was tested in mock 2…and not in a vague way…out and out tested. There are lots of formulas I don’t remember seeing in Schweser, but I feel like I saw this one every freaking day.
When I first saw that formula I thought crap I’m going to have to memorize this one too. It’s all bark and no bite though once you break it down.
I agree. This formula sticks in my head.
a tip for you: Don’t replace “div yield” with “payout ratio” A little free advice.
plyon Wrote: ------------------------------------------------------- > Schweser class notes say this formula is very > unlikely to be tested. The key point to > understand is that there is a formula that allows > you to determine the length of the high growth > phase give r, g, the normal growth, etc. > I don’t think I’d trust Schweser (or anyones) prediction of what will be on the test.
formula for gowth duration is also a good source of questions to test the relationships (directly or indirectly proportional) between high growth phase company and index p/e, div yield etc