Greetings Maybe i’m thinking too hard about this but… In problem # 14 we are supposed to compare DDM & FCFE valulations. FCFE and earnings are supposed to grow @ 9% after year 3. In the solution, looks like the book calculates terminal value in DDM using g = 9. BUT!! isnt g = sustainable growth rate = retention ratio x growth?? on page 457 in the solution the terminal DDM is calculated as $3.0175 / (.1225 - .09) but shouldnt g = .09 x .4 ? i.e. growth x retention ratio? maybe g they give for earnings is supposed to be the sustainable rate already?? but how would one know that on the exam.
Sustainable Growth Rate = earnings retention ration x return on equity (NOT growth). So in this example it appears (since i don’t have the q in front of me) that g = SGR
sustainable growth rate= retention rate*ROE (NI/Equity)
ugh. duh. of course. thank you, not sure wtf happened there…