I am just trying to preempt GGM manipulation, please check my working.
r=D(1)/P(0) + g
r=D(0)/P(0) * (1+g) + g
this can be re-arranged…
(r+1)/(g+1) = D(0)/P(0) + 1
or equally,
D(0)/P(0) = (r+1)/(g+1) -1
(page 250 equity) it’s not in the text, but think it’s worth remembering…
…another one… H model can be used to solve for D(0)/P(0) using the equation on bottom of page 264. that doesn’t require much effort though.
D1 = p0 / (r-g)
r = D1/P0 + g
r = D0 (1+g) / P0 + g
going from there to
(r+1)/(g+1) = D0/P0 + 1
this is simply not correct. Please wipe this out from anything you have learnt.
r = D0 (1+g) / P0 + g
r = (D0/P0) + (g.D0/P0) + g
r + 1 = (D0/P0) + (g.D0/P0) + g + 1
r + 1 = (D0/P0 + 1).(g + 1)
first try was with a coffee, now I’ve had a beer.
found an example to back it up…
Reading 33 EOC 7
model answer is numerical substitution, then isolation of g.
Using my method, you can plug & chug.
g = (r+1) / (D0/P0 + 1) - 1
(using data from question 7)
g = ( 1 + 0.1) / ( 1/24 + 1) - 1
g = 1.1 / 1.041667 -1 = 1.056 -1 = 0.056 == 5.6% as in the answer
I think it saves at least 30seconds…
Couldn’t you just plug the middle answer choice for g into the usual GGM form and check to see if the resulting price is too high, too low, or just right? S2000 and many others point this out as a good test taking strategy.
Also, my personal preference is to memorize as little as possible, so being able to manipulate or derive a formula from a basic relationship is my method of choice. It’s probably easier than memorizing different formulas that are derived from the same starting place.
fair comment.
I find derivations easy to remember & of course find equation P0=D1/(r-g) the easiest to remember. but now i’ve done the derivation, I’m more confident solving for r or g quickly.
I only hope, if there is a 3-stage-H question it does not ask for g, then of course I will be using the s2000 method.
if you didn’t guess i’m doing the reading 33 EOCs. question 20 you can use this way too…
it’s in my muscle memory now, easy peasy