I have a question about #6 in the fourth question set in 2014 CFA Mock A
The question reads:
[question removed by admin] So here’s my question: the GDP forecast is not stated as either nominal or real, but presumably any value not specifically labelled “real” should be nominal. Why does the answer then add the inflation rate to the earnings growth rate?
The long-term corporate earnings growth premium will be 1% above GDP growth. So the actual growth rate is 3.5%
Right, but in the answer they add 1.75% and 3.5% to get the total nominal earnings growth rate. Why would they add the 1.75% inflation rate when GDP growth is given in nominal terms?
I beleive GDP is given in real terms which is why you must add inflation.
Well they didnt say growth was in nominal terms they just gave you the GDP growth rate and as per the equation to solve equity returns you add inflation.
If an inflation term is given in addition to a GDP figure, you should assume the GDP figure is in real terms if it isn’t specified.
You guys have probably noticed it, but the CFAI is forcing candidates to manipulate these “plug and chug” formulas more and more. If you haven’t seen it, one of the mocks forced us to derive the expected change in the P/E ratio in a really funky manner.
Gone are the days of simply adding up the variables. These questions look deceptively easy on the surface. Definitely something to watch out for on exam day.
Yes Chuck I F’ed that question, couldn’t wrap my head around it under enormous time pressure.
the way i remember it was extension from ggm that derived to d/p + g the g is earnings growth (the one equity growth premium plus gdp growth) the gk model then i just rearrange adding d/p +g with +infl + p/e expansion - change in no of share 1.95+ (1+2.5) + 1.75+.15- (-1)
Thanks, LeveragedTiger - it’s good to have a rule of thumb.
For the reference of future readers, since the admins removed the question, the growth was stated as:
GDP growth will be 2.5% per year.
No indication was given as to whether it was nominal or real growth, though, as LeveragedTiger pointed out, apparently we should assume it’s real growth when inflation is also given.
Can someone explain how repurchase yield works? when do we add it because its a double negative? and when do we subtract it?
if they repurchase shares its a double negative so its a positive? and if they issues shares its a positive so you will subtract it from the equation? is this the right way to think about it?
If a firm buys back shares the will most likely buy it at a price her than the current price (same MV less shares, need a premium to induce shareholders). If they sell shares they will lower the price (need a discount, same MV but more shares). This will affect the return per share. If they buy back (less shares) it should have a positive affect on prices. If the issue shares (more shares) it will have a negative effect. Delta S is changes in share
so a repurchase yield of 1% means they are buying back shares.
if they say repurchase yeild declined 1% they are issueing new shares.
it will be Div Yield - (-1)
it will be Div Yield - 1
is that correct?
Yes your thinking is correct. delta repurchase yield/repurchase yield. If the yield goes UP your BUYing repurchasing a larger number of shares. If it goes DOWN, your repurchasing less shares.
If shares outstanding decrease, the repurchase yield is positive because it represents a cash return for an investor. The opposite is true.
Turns out this is the same question as #30 on the 2011 mock, where instead of giving GDP (2.5%) and earnings (GDP + 1%) separately, they gave “Long-term corporate real earnings growth at 3.5% per year”.
So, this is yet another CFAI screwup.