Anoher Errata for 2013 Mock?

So for q’s 59 of the am session, the answer just assume that next year RI = Previous year RI * growth rate,

how in the world they come up with this method of calculating the RI?

isnt it RI can only be calculated by (E - rB)*B0 or (ROE - r)*B0,

where in the book said that we can juz assume next year RI = previous year RI * growth rate?

Gordon Growth Model, bro

Errrr, that is the point, where do you see in the curriculum that we can use GGM to calculate Residual Income?

GGM is used for dividend model; it does not apply to the residual model

next year RI = previous year RI * growth rate when it is assumed that

  1. Capital structure remain unchanged

  2. Growth is costant to all components eg. sales, expenses

Let me know if I"m missing something.

how can you use a DIVIDEND growth rate to calculate the RESIDUAL INCOME, residual income is the income after equity charge, it has nothing to do with the growth rate of the dividend, furthermore, in the exhibit of this question, it explicitly says that growth rate beyond 2022 is 0

anyways i found the answer, but it does not involve the calculation of the growth rate, the correct way of doing this given the information is

E = ROE x BV so, 0.2*5.32 = 1.064

1.064 - dividend + BV = 5.9584,

I am positive that this question should have been solve like this instead of what is in the answer,

I’m not saying USE DDM GGM.

I’m merely pointing out that under the two assumptions mentioned above, you can just derive RI @ t = RI @ t -1 * g without having to recompute every single accounting line every year from Sales to NI to get to the next year RI.

I’m not shitting you, run the excel.

I believe in problems like those they are assuming constant payout ratios. Therefore, if your dividends are growing at a constant rate, then your earnings are growing at that same constant rate, which translates into ROE… etc

Yes yes…thanks for pointing out the 3rd assumption too ;p