Schweser Vol 2 / Practice Exam 2 (Afternoon): Question 92

Q92 asks you to calculate the franchise P/E based on the “best case scenario” From the curriculum we know the following franchise P/E = Franchise Factor x Growth Factor = ((1/r) - (1/ROE)) x (g/(r-g)). The questions provides us with r = 0.10 Div/Net Income = 0.60 long-term earnings and dividend growth = 0.04 Since g = ROE x retention rate, we can solve for ROE = 0.04/(1-0.6) = 0.10. Hence, we get a franchise factor of 0. Schweser, however, solve the problem using the given leading P/E (=10) and substracts the base (tangible) P/E to solve for the franchise P/E. 1. The two methods should come to the same result, shouldn’t they? Why is my way not working? Did I mixed up concepts or are the data provided not sufficient to use them in the way I did it? Has anybody solved the questions and has a answer to my questions? 2. Has anybody read about the way Schweser did it? Maybe even by other study note providers?

I know - this is a tough one … may you can’t use my approach because there is a difference b/w the short- and long-term growth rate?