There is an example in the book (pg 321) with a GGM model with a negative growth rate, per the example, the negative growth rate is NOT applied to the dividend. Is this solely b/c it states its next years div? And if I was todays dividend just adjust (1+g) downward?
I recall this question and I completely agree with the first part because we are explicitly given D1 and not D0. As for adjusting the dividend downward, I would think the question would have to be further clarified (i.e. question states dividend rate will decrease). But if by chance it’s not stated and I am given D0, I would be adjusting the dividend downward. …two more cents… this is why I preach the EOC questions are golden. Althought not overly difficult these simple little twists are likely to pop up on the exam.
Thanks, I hear you on the EOC’s, I keep the Kaplan books out for extra examples and you can tell there are numerous pitfalls.