Expected dividend

CFA Level II Corporate Finance
#1

Did CFA change the formula for determining the expected dividend in the curriculum?

Note: I’m a L2 retaker, and I’m studying with 2018 curriculum and 2017 Schweser (changes were too minor to invest in a new set of books).

  • CFAI formula: expected dividend = previous dividend + [(expected EPS * target payout ratio - previous dividend) * adjustment factor]
  • Schweser formula: expected dividend = previous dividend + (change in EPS * target payout ratio * adjustment factor)

Each formula yields a different result (e.g. CFAI EOC Practice Problems #12 on page 188).

Am I missing something?

Any insight appreciated. Big thanks up front!

#2

Do you have your order o operations correct… in the formula part where it shows “(expected EPS * target payout ratio - previous dividend)”

It looks like change in EPS = Expected EPS - previous EPS, so both equations would equalize.

#3

Yeah, the order of operations is correct, multiplication before subtraction, I could have put it in parenthesis as well. See curriculum p. 156.

However, the CFA-formula subtracts the previous DIVIDEND, not the previous EPS, so there’s a difference in the formulas.

Best way to show the difference is if you work through CFAI EOC Practice Problem #12 on page 188 using each formula, and then see the difference.

Mainly it’s about the target payout ratio. CFA formula applies it to the expected EPS, and then backs out the dividend. Schweser, applies target payout only to the change in EPS. Consequently, the CFA approach will always lead to a slightly higher increase in dividend.

I know I’m counting beans here, as the answers choices are usually so far apart that both formulas result in the same ballpark, so to say. However, little stuff like that just bugs me, they can’t both be right as they each have different results. On a per share basis the difference is only a couple cents, but on an aggregate level the total dividend payout would mean significantly different cash flows.

#4

I too would like to know what it is up with this.

#5

I’ve noticed this also. In the CFA books in reading 23, question 12 they use the first formula mentioned above. However in the CFA topic tests, one of the questions in the Aubrey Yacht Manufacturers Case uses the second formula mentioned above. Frustrating!

#6

The old formula was updated in 2018 material

the one we should use now is :

Expected Div = Old div + ( Expected Earning * Div payout ratio% - Old Div) * Adj factor

or at least that what i would use