tibwa Wrote: ------------------------------------------------------- > mwvt9 Wrote: > -------------------------------------------------- > ----- > > I don’t exactly undestand tibwa’s explanation. > > > > > If the mult is P/E, then answer C implies that > > price has to drop more than the earnings to > have > > the overall multiple drop. Why is that? > > > > Don’t try to understand because i don’t fuck*ing > speak english,but let try this. > > P= D1/r-g. So if r low, you get higher denomitor > therfore, lower P. And lower P implies Lopwer P/E But if you want to use math this doesn’t add up (no pun intended). G in the denominator is lower, so the cap rate - growth rate is higher. Holding the dividend constant (assuming lower growth doesn’t impact dividend pmts) and k constant (assuming this inability to live up to expectations doesn’t impact your req’ed rate) then P must be lower. > Or P/E= D1/r-g/E1 = D1/r-g*1/E. Your p is already > low. This model can’t predict the impact on P/E. Price is going down and earnings are going down but its not quantifiable. Maybe use justified P/E: P/E = (1-b) / (r-g) - so holding the retention rate constant (see above regarding dividend pmt), the cap rate is higher, which results in a lower P/E. You will not buy a stock of a company that is > not making money unless you are a contrarian or > some value addict sh*t see prior post 
ValueAddict Wrote: ------------------------------------------------------- > tibwa Wrote: > -------------------------------------------------- > ----- > > mwvt9 Wrote: > > > -------------------------------------------------- > > > ----- > > > I don’t exactly undestand tibwa’s explanation. > > > > > > > > > If the mult is P/E, then answer C implies > that > > > price has to drop more than the earnings to > > have > > > the overall multiple drop. Why is that? > > > > > > > > Don’t try to understand because i don’t > fuck*ing > > speak english,but let try this. > > > > P= D1/r-g. So if r low, you get higher > denomitor > > therfore, lower P. And lower P implies Lopwer > P/E > > But if you want to use math this doesn’t add up > (no pun intended). G in the denominator is lower, > so the cap rate - growth rate is higher. Holding > the dividend constant (assuming lower growth > doesn’t impact dividend pmts) and k constant > (assuming this inability to live up to > expectations doesn’t impact your req’ed rate) then > P must be lower. > > > Or P/E= D1/r-g/E1 = D1/r-g*1/E. Your p is > already > > low. > > This model can’t predict the impact on P/E. Price > is going down and earnings are going down but its > not quantifiable. Maybe use justified P/E: > > P/E = (1-b) / (r-g) - so holding the retention > rate constant (see above regarding dividend pmt), > the cap rate is higher, which results in a lower > P/E. > > You will not buy a stock of a company that is > > not making money unless you are a contrarian or > > some value addict sh*t > > see prior post Ooops, i did not mean to say r low But g instead.
Hmmm…let me shoot myself. I am picking A. Price will begin to drop slower than earning, therefore, PE will increase initially. With a higher PE, stock will appears to be overvalued, therefore, investor bring down the stock price.
What is the answer?
mumukada Wrote: ------------------------------------------------------- > C it is > > There…aren’t you all feeling much better now!! > > > wish we’d see more of these on the actual exam > day!
mumukada Wrote: ------------------------------------------------------- > P/E = D/E / (k-g) > > so if the growth expectations are lower then, P/E > will automatically be lower > > because the price multiple declines - but growth > investors look for high price multiples - this > isn’t attractive anymore - so the stock price will > also decline. mwvt9: you agree with that answer. Because i told you that unless you were some Value Style manager, you would not want to bet on a stock like that. The only reason that you use a growth startegy is because you believe that the stock will continue to grow, the company will continue to be profitable (momentum baby, momentum). And ussually when earning is good, price go up faster than the rate of the earning and this is how you ppl in wall street skrew my life:-)
Nobody likes a busted growth stock, so if earnings growth slows, the willingness of an investor to “pay-up” for growth also falls, i.e. P/E falls. lower forecasted eps x lower current pe = lower price.
Thanks guys. I understand the logic now.
I understand the logic, but feel that it isn’t the garunteed reaction. Answer “A” could just as easily happen. For instance, say you’re trading at high P/E because of high growth expectations but you miss a year in a young company with a good R&D pipeline such as biotech. It could be that the R&D has hit a snag and needs an extra year for key driver products to hit the pipeline. It could also occur in a cyclical company. In either case, terminal value will remain high and largely unaffected if future growth estimates remain relatively stable, thus price sensitivity will not be as large as earnings sensitivity. Think of the Molodovsky Effect. It really depends on the market’s reaction to the miss and must be evaluated on a case by case basis. This is further backed by the behavioral research we studied in which framing, anchoring and bayesian rigidity frequently cause analysts to to be slow to fully adjust their estimates.
mwvt9 Wrote: ------------------------------------------------------- > Good use of math and swearing to overcome language > barrier. lol!
First A. Then C.
^^ wish that was Option D! what I don’t get…is how a “No traps” thread gets 2 pages long…!
Easy. “No trap” thread title was a trap.
OK, what is the answer?
mwvt9 Wrote: ------------------------------------------------------- > Easy. “No trap” thread title was a trap. Should’ve known…anytime CFA material is involved, it’s ALWAYS a trap. The CFAI: It’s not coincidence CIA is in the name
ws Wrote: ------------------------------------------------------- > OK, what is the answer? the answer was C…had posted earlier…