LOS 46 r Can anyone think of any reason that we would need to actually memorize (or take the time to rearrange) the forumla for the H-model SOLVED FOR REQUIRED RATE OF RETURN ®on the exam? I know the formula when solving for Value (or price), but the forumla for r isn’t intuitive to me and I don’t want to take the time to learn it (rearrange it). If they ask us for required rate ®, then I am just going to look at the answers, pick on in the middle and plug into the formla and see if the generated stock price matches the price given. If it is too high then I will know which answer to test next. This should save me some time and I will be looking for all the time I can get. Are there any conceptual reasons that should make me reconsider?
i would learn to rearrange the formula rather than learning the actual formula that calculates the R from the H model. Better play it safe with Equity. What do you think?
All I’m saying is that you are going to have 4 multiple choice answers in front of you. You can just plug the answers into the original formula and calc P, compare it to Stocks price. If they are the same then you know you got it. If not you have to do it again. If you choose one of the values in the middle then you will only have to do it twice tops. I guess I am just thinking about this from and exam taking strategy too…in case I forgot the formula. I have been know to screw up rearranging more complex forumlas…kind of sad, but true. Still learning my PPMDAS!
This strategy is basically what you have to do with the two stage model anyway. Guess and test.
Rather than rearrange I’m definitely going for the plug. Have enough formulas to worry about and it may only take another 20 seconds to plug 3 more numbers once you have it set up.
Actually you are right. Thank you. This would help to focus on other more difficult questions. I will try it out when I find a similar question.