# Grinold Kroner Model- Practice Problem

• The dividend yield will be 1.95%.
• Shares outstanding will decline 1.00%.
• The long-term inflation rate will be 1.75% per year.
• An expansion rate for P/E multiples will be 0.15% per year.
• The long-term corporate earnings growth premium will be 1% above expected real GDP growth.
• Expected real GDP growth will be 2.5% per year.
• The risk-free rate will be 2.0%.

The problem asked to calculate the equity returns using the Grinold Kroner method.

I got 7.35%. While the answer according to the CFA 8.35%
For expected earnings growth, I used 2.5% +1.75% while the CFA added also the 1%, but my logic was not to add the 1% because a company cannot grow more than the economy on the long term.

Keep in mind that this model accommodates short term forecasts so itâ€™s possible earning growth rate surpasses long term GDP growth rates in the short run.

Greetings friend! A way to think of the G-K model in this scenario is:

Dividend yield + (expected inflation rate + real growth rate of earnings) - (share growth) + (P/E growth)

So it equals 1.95% + [1.75% + (2.5% + 1%)] - (-1%) + 0.15% = 8.35%

Cheers - good luck - you got this