Is the formula:
If the formula in (D1/P0 - Change S ) + (i+g) + Change PE
and change in S is a negative % then why would they still solve it this way:
D1/P = 4
Change in S = -0.5
Answer : 3.5 … wtf? should it be 4.5 since its - and ( - ) x ( - ) = + ?
Sample 2009 Question 5 part A.
Can anyone explain please?
I have memorized it this way to avoid confusion:
GK Model
Expected return on security = Income return+nominal earning return + repricing return
= DIV1 / Po - change in S + i + g + change in PE
Look for ques. if repurchase yield is given instead of change in no of secuirites i would simply change the above formula with + change in S & would look at the sign of repurchase yield
As in this question repurchase yield is -ve
Income return = 4 - 0.5 = 3%
instead of memorising as above …
Delta S in the formula - is Change in # of outstanding Shares.
When repurchase yield is provided and is positive -> it means that due to some action by the company the yield increased. That could only happen if the # of Shares DECREASED because the company BOUGHT BACK its shares. So DeltaS is NEGATIVE. So -(DeltaS) will be positive.
When Repurchase yield is NEGATIVE -> it means company ISSUED SHARES so the change in number of shares is POSITIVE. So -DeltaS is NEGATIVE.
^ thnx cp. It helped
With 19 days left & so much content to revise & remember :(…i somehow thot to memorise it the above way…
if shares go up = bad for expected return, so it is subtracted in formula
if shares go down, good for expected return, so it is added in formula
a negative repurchase yield means shares increase = bad for E® = decreases E® in formula
^ this is what i go by as well
2009 AM Q5.A Repurchase yield: -0.5%
positive repurchase yield = decrease in shares outstanding
=) thanks