DDM - value of stock?

CF0=0 CF1=0, F1=1 Dividend in year 2 is 1.5, earnings in year 2 are 1.5/.4=3.75, earnings projected to grow at 8%, in year 3 earnings will be 4.05 Earnings growth = company growth = 8%=> 8%=RR*15%=>RR=53.33, payout would be 1-RR=46.67% and dividend would be 4.05*46.67%=1.89 P2=1.89/(.12-.08)=47.2534 CF2=1.5+47.2534=48.7534 NPV with I=10%, that gives me 40.29~41, say A.

in the definition of g=(RR)(ROE), g is defined as earnings growth. therefore earnings growth is stated twice at 8% and 9%. Its either one or the other… the numbers don’t add up (or in this case multiply).

different growth rates in different years is not an issue

map i agree, for different time periods, different growth rates are fine. but the question states all those numbers as EXPECTED, therefore its your future growth rates, and those numbers should multiply together to get 8%.

And they do tell that the growth rate in year 2 (for year 3) is expected to be 8%. Has nothing to do with the implied growth of 9% in year 2. They just change the retention ratio.

and thats why it’s a bad question. I read it as: At the end of year two, ROE is .15, RR is .6, and g is .08, which is impossible.

Nope, they say that at the time of dividend pay(year 2), the payout is 40%, ROE is expected to be 15% next year, and the projected g (for the next year) is 8%.

but thats my whole point, both of us are sure of ourselves and we both read it differently. hence why its a bad question.

this Q is coming from BSAS…is that a proper CFA assist?