If they give you the equity repurchase yield of -.5% and the div yld of 4.0% and ask for the income return why is the income return 3.5 and not 4.5? the grinold kroner formula is -change in S. so wouldnt that change be a negative .5 and thus 2 negatives make a positive? Or when they say repurchase yield is -.5 that means it equals and is the negative change in s?
I know what question your are talking about. My guess is that they will be very clear at the exam. I am pretty sure they accepted both answer in that exam since it was so poorly written.
The real deal is : if they repurchase share, then the growth will be higher. so if they say they have repurchase 1% of the available share, the change in S will be -1% , so -(-1%) will be +1% overall
if they do stock emission, and increase the number of share available by 1% then it will be -(1%) on the total growth.
The question says “yield” and not “change in shares outstanding.” So a negative “yield” implies that there was a positive change in shares outstanding, meaning shares were issued. This has a negative impact on total return.
IMO it’s crazy that the exam tries to trip up the candidate with wording rather than just testing concepts.
I would just remember that repurchase yield = - change in S issued. From your example, it looks like more shares were issued, not repurchased.
So you would always either: (i) add repurchase yield or (ii) subtract change in issues outstanding.
When a company repurchases its shares, it’s good for the shareholders; hence, expected return goes up.
Model answer.