Equity - DDM - EOC Question 26

CFA Level II
#1

States in point III taht the growth rate declines linearly from 14% in the first year to 7% in the ninth year. Finding Vo using the H model technique.

In the answer it uses 4 for H. WHY? Doesnt that mean it would take 8 years to decline to the new 7% rate. I used H = 4.5 and my answer was wrong (I’m thinking 9 years for the decline)

Whats going on? Thanks

#2

There are 8 years from the first year to the ninth year:

  1. Year 1 to year 2
  2. Year 2 to year 3
  3. Year 3 to year 4
  4. Year 4 to year 5
  5. Year 5 to year 6
  6. Year 6 to year 7
  7. Year 7 to year 8
  8. Year 8 to year 9
#3

Maybe I’m just having a slow week mentally but the question says:

The growth rate would decline linearly from 14% IN the first year to 7 percent in the 9th year.

The first year is from t = 0 to t = 1 and not from Year 1 to Year 2 (this would be the second year)

And we also know it’s an H model so it has to begin from t = 0.

From this year 9 is from Year 8 to Year 9.

Thanks,

#4

I think it’s just a poorly worded question. In the first year must mean from t=0 to t = 1 because it’s an H model. It could start from t = 1 if it was a three stage model.

I think when it says TO 7 percent in the ninth —> I think it means to the beginning of the 9th year which is the end of the 8th year.

Opinion?