 # Grinold Kroner Model .. Confused?

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.

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