Growth Duration Q

Wow, to be honest, this is the first time I seen this type of calculation. Can anyone write out the full formula or the rational behind this calculation? Thanks.

Thanks…

ln{(High P/E) / (Low P/E)} = T * ln{(1 + DIVhigh + GROWTHhigh)/(1 + DIVlow + GROWTHlow)}

Try this one on … The price-to-book value (PBV) ratio for a high-growth firm will: A) increase as the growth rate in either the high-growth or stable-growth period decreases. B) increase as the growth rate in the high-growth period increases and decrease as the growth rate in the stable-growth period increases. C) increase as the growth rate in either the high-growth or stable-growth period increases. D) increase as the growth rate in the stable-growth period increases and decrease as the growth rate in the high-growth period increases.

Could it be as simple as C? Edit: It is probably not.

Answer is c

Thank god. Calling it a night so I can end on a right question. Thanks for the question.

B

I am not going to be able to sleep tonight

i couldn’t figure out the schweser book 6 exam Q on this… i think that’s where i saw it… from vague memory, it might have been errata, but i couldn’t find a bunch of info.

Okay I did this question. It’s Ln (25/16)= T [(1+.01+.16)/(1+.03+.06)] Which gives T=6.3. vs 5 years which Bentley believes. I would think that the intrinisic value is 6.3 years that would mean to buy the stock? It has longers years to maintain p/e ratio before it deminishes. I remember doing this question to the testbank and the number i Calculated was lower than the expected value and the answer was to short it.

C) increase as the growth rate in either the high-growth or stable-growth period increases. P/B = (ROe- g)/(R-g) So if g goes up the denominator will fall and cause P/B to rise and if g goes down, the denominator will increase, causing P/B to fall. Assuming that the denominator has a greater affect than the numerator.

CFAdummy Wrote: ------------------------------------------------------- > Okay I did this question. > > It’s Ln (25/16)= T [(1+.01+.16)/(1+.03+.06)] > > Which gives T=6.3. vs 5 years which Bentley > believes. I would think that the intrinisic value > is 6.3 years that would mean to buy the stock? It > has longers years to maintain p/e ratio before it > deminishes. > > I remember doing this question to the testbank and > the number i Calculated was lower than the > expected value and the answer was to short it. The market has priced it at 6.3 years, but he thinks that it will be only able to sustain the higher growth for 5 years, hence it is overvalued.

The answer to the 2nd question lies is the Justified P/B multiple Justified P/B = (ROE - g)/ (r - g) As ROE Increases, P/B increases If g increases, then r-g becomes smaller and P/B increases. However the numerator decreases but as the growth opportunities increase SO DOES the ROE.

He thinks its 5 but the intrinsic value is 6. The higher the years, the longer it is able to sustain P/E. Wouldn’t he want to buy it because the PE will be able to sustained for longer period of time?

intrinsic value is not 6.3 years… the Market is pricing it at 6.3 years … He only thinks the growth will last for 5 years - so the high P/E is NOT justified in this case - it is expensive…hence sell

The calculation gives me 6,3 years. The market has priced the high growth stock higher than what Josh think is right. Therefore he must short the stock ->B