If that was your argument for using GDP, why wouldn’t you go with A instead?
It isn’t my argument…I am trying to figure out how the answer could possibly be B.
C Geometric mean would be the lowest of all.
Other tha dancingqueen’s response, why do we think the answer is B? (I suppose another way to look at it is this brain-dead way where we say “The dividend rate is too high” => “Replace it with something lower, like GDP rate which must be lower or we wouldn’t think the dividend growth rate was too high” - If so, I’ll barf).
I am just going off what dancingqueen said. So if that is a joke then I don’t know. I would have guessed D.
B. I don’t recall any reference to this in the CFAI books, but it’s common practice in financial modeling to make the long-term perpetual growth rate ~equal to the growth of the economy- never more.
D if dividend growth is based on increasing payout ratio Else A. But as one can make only one choice, I would go with D
Zombie71 Wrote: ------------------------------------------------------- > B. > > I don’t recall any reference to this in the CFAI > books, but it’s common practice in financial > modeling to make the long-term perpetual growth > rate ~equal to the growth of the economy- never > more. So if you make the long-term perpetual growth rate = growth rate of the economy that says that all stock prices are a function of their current dividend and their cost of equity. Since the current dividend is pretty much meaningless that pretty much means that all stock prices are just functions of their cost of equity which is sounding a lot like a CAPM model. So why do this to begin with?
I picked A, but the official answer is B.
JoeyDVivre Wrote: ------------------------------------------------------- > Zombie71 Wrote: > -------------------------------------------------- > ----- > > B. > > > > I don’t recall any reference to this in the > CFAI > > books, but it’s common practice in financial > > modeling to make the long-term perpetual growth > > rate ~equal to the growth of the economy- never > > more. > > So if you make the long-term perpetual growth rate > = growth rate of the economy that says that all > stock prices are a function of their current > dividend and their cost of equity. Since the > current dividend is pretty much meaningless that > pretty much means that all stock prices are just > functions of their cost of equity which is > sounding a lot like a CAPM model. So why do this > to begin with? To clarify, my point is more applicable to cash flow models rather than DDM.
I see that B is correct, but that doesn’t make a lick of sense to me.
Just because Schweser (or CFAI) says it’s true doesn’t make it true. Just answer that way on the test.
Zombie71 Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > Zombie71 Wrote: > > > -------------------------------------------------- > > > ----- > > > B. > > > > > > I don’t recall any reference to this in the > > CFAI > > > books, but it’s common practice in financial > > > modeling to make the long-term perpetual > growth > > > rate ~equal to the growth of the economy- > never > > > more. > > > > So if you make the long-term perpetual growth > rate > > = growth rate of the economy that says that all > > stock prices are a function of their current > > dividend and their cost of equity. Since the > > current dividend is pretty much meaningless > that > > pretty much means that all stock prices are > just > > functions of their cost of equity which is > > sounding a lot like a CAPM model. So why do > this > > to begin with? > > > To clarify, my point is more applicable to cash > flow models rather than DDM. That makes much more sense to me.
anishcandy Wrote: ------------------------------------------------------- > C > > Geometric mean would be the lowest of all. You can’t just arbitrarily replace a key number in a valuation calculation with another number because it’s lowest, with no economic or mathematical logic behind it. That’s just dumb. Secondly, how can you garuntee the geometric mean of a company’s dividend growth is lower than the GDP or earnings growth rate, keep in mind that dividends can still grow while earnings decline. Holy crap.
D…undoubtedly
Can anyone point this out in the readings?