Under the Dividend Discount Model Approach ,while explaining that g = ( 1 - D/EPS)* ROE , the CFAI reading defines ROE to be the ‘historical return on equity’. However, it then goes on to use an example where it uses Citibank’s estimated avg return on equity going forward instead of trailing return on equity. Doesn’t this show that maybe it should have defined the ROE to be the expected return on equity going forward? Also, can someone explain how (1 - D/EPS) is the earnings retention rate? Is this information given in some other reading?
Regarding the second question
D/EPS = Div payout ratio or for better understanding consider it as percentage, so when you reduce Div payout percentage out of 100% the remainning will be retention percentage ; thats what done above
Regarding the first question , can you give me he example no.
We often use historical measures – ROA, ROE, gross profit margin, whatever – to make projections going forward; they’re historical measures nonetheless.
1 − DPS/EPS
= EPS/EPS – DPS/EPS
= (EPS – DPS) / EPS
= Earnings retained per share / EPS
= Earnings retention rate
Okay understood, thanks to both of you!
My pleasure.
You’re welcome.