Reading 41 Q19 and Q20 CFAI

CFA Level II
#1

Could someone explain the answer to these? I’m close, but I don’t understand it from the CFAI explanation. 19. Current level of S&P index = 1200 Current dividend on the S&P index is 30 Long term US gov bond yield = 4.75% Future earnings growth rate of the S&P index = 6.75% The Gordon growth model estimate of the equity risk premium is: A. 4.50% B. 4.67% C. 7.25% 20. Current E/S is 2.40 Current stock price is 20 Return on book equity is 12% Sustainable growth rate = 4% The estimate for PVGO for the company is closest to: A. $5 B. $9 C. $11

#2

Bradleyz Wrote: ------------------------------------------------------- > Could someone explain the answer to these? I’m > close, but I don’t understand it from the CFAI > explanation. > > 19. > > Current level of S&P index = 1200 > Current dividend on the S&P index is 30 > Long term US gov bond yield = 4.75% > Future earnings growth rate of the S&P index = > 6.75% > > The Gordon growth model estimate of the equity > risk premium is: > > A. 4.50% > B. 4.67% > C. 7.25% > > 20. > > Current E/S is 2.40 > Current stock price is 20 > Return on book equity is 12% > Sustainable growth rate = 4% > > The estimate for PVGO for the company is closest > to: > > A. $5 > B. $9 > C. $11 19: 30*1.0675/1200 + .0675-.0475 = .0467. B 20: 2.4/.12 = 20. … u sure the current price is 20?

#3
  1. P=1200 D=30 rf=4.75 D1=D0(1+g) = 30*(1.0675) D1/(r-g) = P0 so r = D1/P0 + g = 30(1.0675)/1200 + 6.75 = r = 9.42% r = rf+ERP=4.75+ERP ERP = 9.42 - 4.75 = 4.67% Ans B
#4

so many ways for this one: I used 1200 = (30*10.615)/[(0.0475 + ERP) - 0.0675] and solved for ERP, getting 0.0465

#5

Yes, like CFABLACKBELT, I am also getting PVGO = 0, if the stock price is 20.

#6

Me three.

#7

the only way get one of the answers in the second question is to add the SGR and the return on book equity then PVGO = 20 - 2.40/0.16 = 5 But that doesn’t seem correct

#8

19.) B 20.) only answer I can come with that is a choice is 11 2.4(1.04)/.08 =31.2 - current price of 20 is 11 makse no sense though, should be 0.

#9

maybe this way: P = D1/(r - g) so 20 = 2.40(1.04)/(r - 0.04) 20r - 0.8 = 2.496 r = 0.1648 Then PVGO = 20 - 2.40/0.1648 = 5.43 which is closest to A

#10

newsuper Wrote: ------------------------------------------------------- > so many ways for this one: > > I used > > 1200 = (30*10.615)/[(0.0475 + ERP) - 0.0675] > > and solved for ERP, getting 0.0465 Newsuper, where does 10.615 come from?

#11

.

#12

Just an observation…aren’t you guys assuming 12% is the required return when the question states it is the ROE?

#13

in the equity book - they do refer often to re as Return on equity.

#14

cjones65 Wrote: ------------------------------------------------------- > newsuper Wrote: > -------------------------------------------------- > ----- > > so many ways for this one: > > > > I used > > > > 1200 = (30*10.615)/[(0.0475 + ERP) - 0.0675] > > > > and solved for ERP, getting 0.0465 > > > Newsuper, One more time. Where does 10.615 come from? Newsuper, anyone?

#15

I don’t get the 10.615 either… I did: 1200 = (30 * 1.0675) / [(ERP + .0475) - (.0675)] Which turns into: ERP = [(30 * 1.0675) / (1200)] + .0675 - .0475 = .0467 or 4.67% ---- For the second question, I’m getting PVGO = 0… I don’t think the price is correct but who knows

#16

I think he meant 1.0675 and it got mistyped as 10.615 instead.

#17

people - in the PVGO equation the E which stands for earnings is E-sub-1 i.e. “expected” earnings. so, i come up with 20 - ((2.4)(1.04))/.12 = 20 - 20.8 = - .8. wierd. i tried to convert PVGO to P/E somehow but got lost.

#18

sorry about my last post, E-sub-1 is wrong, its really just E/r. schweser’s quicksheet has it incorrectly lisetd as E-sub-1 / r. also, the answer for the first ERP question is A, and here’s how. i had also followed the regular GGM the first time, but then stumbled on this formula in the notes. ERP via GGM when doing so for an index = Dividend Payout + Long - Term Earnings Growth Rate - Long-term US govt bond yield dividend payout = 2.5% + earnings % = 6.75% + govt bond yield = 4.75% - ERP = 4.50%

#19

so you dont use D1?

#20

cjones65 Wrote: ------------------------------------------------------- > newsuper Wrote: > -------------------------------------------------- > ----- > > so many ways for this one: > > > > I used > > > > 1200 = (30*10.615)/[(0.0475 + ERP) - 0.0675] > > > > and solved for ERP, getting 0.0465 > > > Newsuper, where does 10.615 come from? yeah sorry it was a typo, should have been 1.0675