stating " H= t/2 and t: the length of the time period over which the growth rate will change from gS (short-term, abnormally high-growth rate) to gL (long-term, normal-growth rate) in a linear manner"
can you advice why in practice test they use for " A growth rate of 20% per year over the next four years (2014 through 2017) and a 6% constant growth rate beyond 2017" the H as 4/2= 2?
I am confused as see only supernormal growth during 4years and then immediate switch to 6% going forward? Should not be stated a bit differently?
After doing a couple of practice questions, I think that while it may state a high growth rate for x years followed by a perpetual lower growth rate, if you are asked to calculate a value using the H-model, you assume that the period of x years is a transition period from the initial high growth rate to the lower growth rate.
So my understanding is that yes, the wording could be clearer (as in the question you posted), but once you know that this is how you should interpret the question it should be fine.
I think they could word it a little better. However, they explicitly tell you to use the H-model-- there shouldn’t be any confusion from that point, since you have all the inputs necessary.
I look for keywords/phrases like “linearly” and “overtime”. I.e. The firm is expected to grow by 20% over the next four years then DECLINE LINEARLY OVER THE NEXT 10 years to a stable rate of 5%
Yet, they did tell you the model to use. I don’t remember the exact words in the practice test for Equity, but it was essentially, “Timmy prefers to use the H-model,” or, “Timmy thinks growth will be X for 5 years and decline to Y over 10 years.” Then, the question asks you to use Timmy’s preferred method or base the valuation on Timmy’s beliefs. I don’t know how much more clear they could get…