Equity QBank Question

CFA Level II
#21

damn it, good job you guys :slight_smile: I agree the wording is not very clear though.

#22

thanks for posting the question, maaagian. wording is very important, we have to be careful on the actual exam.

#23

Good Q, maggy. and good discussion everyone!

#24

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#25

i did it the same way as dinesh… cause it says NEXT year’s RI. so C

#26

mike0021 Wrote: ------------------------------------------------------- > i did it the same way as dinesh… cause it says > NEXT year’s RI. so C Do you use the NI at N+2 in order to compute RI at N+1 ???

#27

maaagian Wrote: ------------------------------------------------------- > > Therefore, wouldnt the 0.58 answer only be correct > if they asked us to calculate RI in 2 years? When > I did the equity section I noticed a couple of > these questions so just wanted to make sure so do we have an answer to maagian’s question here?

#28

Btw, here is the message I previously posted: “So, they FORECASTED last year’s earnings (since you have to multiply it by the growth rate to get next year’s earnings) I hope that they did a good job FORECASTING last year’s earnings when the actual value was provided in the company’s financials. I sure do hope (and believe) that if this question was to show up on the exam, they would remove the word “forecasted” (if not replace it by “last FYE’s”)” When I wrote this message, my understanding was that you use N+1’s NI to compute N+1’s RI. This is still my understanding. I however start to get confused …

#29

olivier Wrote: ------------------------------------------------------- > mike0021 Wrote: > -------------------------------------------------- > ----- > > i did it the same way as dinesh… cause it > says > > NEXT year’s RI. so C > > > Do you use the NI at N+2 in order to compute RI at > N+1 ??? No, but the forecasted EPS given is for this year (think 2008) and they are asking what the RI will be for 2009. So they gave 2008 beginning book value and forecasted EPS for 2008. They asked what the RI would be in 2009. That is why you needed to grow the “forecased” EPS.

#30

wanderingcfa: Damn, you’re right. Makes it a lot clearer if you put in years instead. I.e. forecasted EPS for 2008 is whatever, what is the expected residual income per share in 2009?

#31

Or just like how you edited your response :slight_smile:

#32

wanderingcfa, So, do you agree that the so called “forecased” EPS is the one for the last year? Do you agree that the word “forecased” is missused in the question?

#33

Expert Systems (ES) has a beginning book value per share of $6.00, an expected growth rate of 15 percent, forecasted earnings per share of $1.50, and a required rate of return of 17 percent. Assuming that the dividend remains constant at $0.75 per share > Therefore, wouldnt the 0.58 answer only be correct > if they asked us to calculate RI in 2 years? When > I did the equity section I noticed a couple of > these questions so just wanted to make sure so do we have an answer to maagian’s question here? The way I interpreted the question is: We’re all hanging out in the boardroom on January 1, 2008. We know what 2007’s ending book value is, $6. We have an earnings estimate for 2008, 1.50, and we think we’ll pay .75 in dividends. But the CFO doesn’t want to know 2008’s RI, he wants to know 2009’s RI so he can spend his bonus two years before actually receiving it. SO we need to figure the beginning book value for 2009, which is the ending book value of 2008 and equals 6 + 1.5 - .75, which is 6.75. That becomes the t-1 book value for our 2009 estimate. 2009 earnings should be 1.50 * 1.15 growth rate and dividends stay at .75. So we subtract the cost of equity times 2008 bv from 2009 EPS and we get .58.

#34

that’s what threw me and I am assuming maratikus off. They said “forcasted earnings” so I assumed that that was next years’ EPS. And once again, assuming things on this exam will get you a big F. Damnit.

#35

I agree with ilvino. And I think forecasted is an appropriate word (we do not know what 2008 earnings will be yet). Also, they would not forecast prior years earnings…that is just strange.

#36

so why are we using book value for year 1 instead of book value for year 0 in coming up with residual income for year 1? sorry. my brain is freezing up here.

#37

brain unfroze. i didn’t read the freaking question correctly. the book value given was the book value at the BEGINNING of the year. sorry guys, a little slow today.

#38

No problem SF - were you one of the guys hanging the “Free tibet” flags from the GG bridge the other day?

#39

LOL. i’m leaving the office early today so i can tackle the flame guy. actually, the flame guy could be a lot of people in sf, so, i change that to, the guy carrying the olympic torch.

#40

Now that I think about it, even if you were arrested by the Chinese armed guard or whoever is protecting the olympic torch, it would not be a violation of the CFAI code of conduct since civil disobedience is permitted.