FCFE, DDM question

CFA Level II
#1

When FCFE is greater than dividends, the value obtained using FCFE will equal the value obtained using DDM if the: A) values will never be equal if FCFE is greater than dividends. B) excess cash is invested in projects with net present value (NPV) of zero. C) excess cash is invested in projects with positive NPV. Your answer: A was incorrect. The correct answer was B) excess cash is invested in projects with net present value (NPV) of zero. When FCFE is greater than dividends, but the excess cash is invested in projects with zero NPV, the FCFE model and DDM will give same estimates of firm value. Just can’t see the logic here. V-FCFE = FCFE /(r - g); V-DDM = Dividend / (r - g) when FCFE > Dividend, how come the 2 values equal??

#2

FCFE is the value of the company to equity holders. Equity holders realize value through dividends and capital gains. If a company is investing in projects that are not adding any value (zero NPV), the only value of the company to the equity holders will be the dividends that they are actually receiving. Please correct me if I’m wrong

#3

FCFE considers both DIV and capital appreciation, while DIV’s are just that dividends (no capital appreciation component) So if you take the excess cash and direct it to projects that have ZERO value, you are basically sinking that money [for all the unix geeks out there = Cash>/dev/null]

#4

Wasn’t expecting that kinda joke on this forum! You can also model CMOs: Payments | pass_through_securities | CMO and then: tar -cvfz *CMO* > bad_bank.tar.gz Alright, back to work…

#5

haha naze, you too?

#6

you bet. I wonder if there’s anybody else???

#7

Lots! I was shocked to see so many doing CFA. lol

#8

There’s plenty of IT guys I guess, but we Unix geeks are a special subspecies…

#9

I am actually not UNIX (but like it and do it for interest). Bread and butter on J2EE.

#10

tranches = split(“CMO”, PREPAYMENT_RISK) tranches = split(“ABS”, PREPAYMENT_RISK&&CREDIT_RISK)

#11

Same here - mostly out of interest. I’ve been an “outlook developer” for the last 2 years (read management).

#12

Ha, another one! Let’s start our own thread!

#13

Some code for PE … lol http://www.analystforum.com/phorums/read.php?12,927177,927192#msg-927192

#14

I was just going over PE this morning, so, good hint… I’ll try to “compile” your code tonight.

#15

Please do it tonight, the production date in my MPP says 6th June. Server downtime 9AM to 5PM where we upload this virus to CFAI’s site.

#16

I’ll do my best… I have a lot of things to compile right now, and I keep getting these compiler errors…

#17

I’m a real unix admin and has been doing it for over 10 years. I’m still wondering how likely I would switch my career. The good thing is that I dont have any pressure on taking L2 test. The worst case is that I’m still working in the IT industry.

#18

Some similarity in IT and FIN. Those smart guys keep creating new products. I didn’t think much when a finance guy said he’s working new product two years back, I thought it’s software product, but it’s CDO or something.