Equity Q-Bank

This one tripped me up. Does anyone know what reading (schweser pg. number) it is? If the growth rate in dividends is too high, it should be replaced with: A) the average growth rate of the industry. B) a growth rate closer to that of gross domestic product (GDP). C) the geometric mean of historical growth rates. D) the growth rate in earnings per share.

No way. After posting this I realize that the same question was posted 45 minutes ago. With all the SchweserPro questions what are the odds! That’s considered good luck. (In Haiti)

sooo… what was the answer?

i think its D, is it? bcoz dviidned should growth similar to earnings otherwise we shouldnt’ be using DDM in the first place.

I would say D dividends are based on earnings per share…and if the company has a sorta target payout ratio…if you have your growth rate in earnings you can estimate the growth rate of dividends…

B my online friends.

what?? why? what’s the explanation

In the longrun the implied growth rate can not really be higher than what the overall economy is growing at. When you think about how the valuation models work, having a LT growth rate much higher than GDP would imply that the company would eventually be larger than our overall economy. This sort of analysis doesnt make much sense. Therefore in the Long Run I think the only possible anwser could be B.