Assumptions: D(0) = 1 gs = 0.12 gl = 0.08 r = 0.10 2H = 8 years The intrinsic value of the stock using the multi-period H model is closest to: A. 59 B. 65 C. 71 Correct response is C, however I’m getting 62 based on the H-model formula. Can someone clarify? Thanks
Search function. This is a 3 stage question. You left out some other assumptions.
i.e. H model is only 2 stages. (decline, maturity)
first move 4 periods at 12%, then use 1.12^4 to calculate V4 using h-model discount all back to get 70.68
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Great, thanks. I guess the key word in the question was “transition phase = 8 years”.
This was from BSAS… i still do not understand why we do not use the regular H model as all of the inputs are there. Why are we still using multi stage?
I’m so lost… was the complete question not included in this thread?
what did u use as d0 in h model the 1.57
I also got 62… V(0) = (D(0)*(1+GL) + D(0)(H)(Gs-GL)) / (r-GL) V(0) = (1*(1.08) + (1)(4)(.12-.08)) / (.10-.08) V(0) = 1.24 / .02 V(0) = $62
Here is the complete question: Susan Edwards, CFA, at Alpha Equity LP uses the H-period DDM model to value the stock of companies having abnormal or super-normal growth rates. Susan has gathered the following information for Great-Value Retailer stock: D(0) = 1 Super Growth Rate = 0.12 Normal Growth Rate = 0.08 Required Return = 0.10 Transition Phase (2H) = 8 years Susan has partially completed the following table: YEAR DPS PV FACTOR PV 1 1.12 0.909 1.02 2 - 0.826 - 3 - 0.751 - 4 - 0.683 - PV of super growth: - Based on the infromation provided, the intrinsic value of Great Value Retailer stock using the multi-period H-model is closest to: a) 59 b) 65 c) 71
Sorry the alignment of the columns didn’t seem to save when the message was posted above.
CPK13’s response sums it up: a) Take the dividends for the first 4 years (high growth phase) and discount to t=0. b) Use the inputs and calculate H-model at t=4 and then discount that back to t=0. c) a+b= V0
well theoretically the high growth phase is for 8 years… if you actually follow the H-model formula you get $62 its exactly the same question as example 16 on pg 317 CFAI book 4 so unless it isn’t really asking for an H-model I don’t know what to tell you If had just been a normal gordon growth model problem it would have a value of $54. The abnormal growth rate is very close to the perpetual growth rate so its not adding a lot of value ($8). $54 + $8 = $62…
Read my post above H model: 2 stage model This problem: 3 stage problem. Calulate the high growth years and then use the discounted H model
Its a pretty crappy question, the key is knowing that the super normal growth doesn’t start its decline until t=4. Stage 1: 12% growth in years 1-4 Stage 2: Then from 4-12 you have the transition phase Stage 3: Then 12 on is the normal growth. Stages 2 & 3 are when you use the H-Model, stage 1 just uses the PV factors that it gives you to discount back the dividends. However, the H-Model gives you the value of the remaining dividends @ t=4, so you’ll need to discount it back using the last PV factor and sum it with the PV of the first 4 dividends. At least i think thats right, and it gave me the right answer!
ahh I gotcha… so I’m assuming if I could actually see our brilliant analyst Susan’s partially completed table the first four years would have been at a constant 12% growth rate which clued you in to the first stage? this is why I don’t use schweser…
same.