Q 36 It says the EPS growth rate is equal to that of its industry after 5 years. The growth assumption is 15% and the growth duration model estimates 5 years. With no further information are we then to just assume that it will grow at the industry average?
Not 100% sure about the question but you said that EPS growth will equal the industry in 5 years, so yes. Let me know if I misunderstood.
I remember that crappy question.
I’m thinking you had to calculate g from g = b * ROE
SlaveII Wrote: ------------------------------------------------------- > Q 36 > > It says the EPS growth rate is equal to that of > its industry after 5 years. The growth assumption > is 15% and the growth duration model estimates 5 > years. With no further information are we then to > just assume that it will grow at the industry > average? Yes, that is what duration growth tells you. You’ll grow at above-industry growth rates for X years, at which point you’ll go to the industry average. It’s that formula with LN, P/Es, High growth rate, div yield, index growth rate and index yield. I don’t think you had to do any calculations for that problem, tho.
Maybe it was a different one in Skate O’Rama, but I do remember using g = b * ROE
That vignette was frustrating because it told you the growth in EPS was 15%, yet roe*g=14.4. I guess when in doubt use the formula.
I rather liked that problem…it was the Brasilian corporate finance one that drove me nuts (both last night and last year on the exam)…the freaking names were hard to distinguish and slowed working the problem for me.
ozzy609 Wrote: ------------------------------------------------------- > That vignette was frustrating because it told you > the growth in EPS was 15%, yet roe*g=14.4. > > I guess when in doubt use the formula. the ‘nominal’ growth in eps was 15%. you need sustainable growth rate for the GGM stuff
the key in that was the “implied” part. By imputing the MARKET data into the duration model- the implied time w/ high growth is 5 yrs. No calculation necessary. This is kind of like when you figure “implied” volatility by solving BSM for vega, or solving for “r” ir “g” in ddm using setting D1/(r-g)=mkt px