In the topic test, Equity- Mckinley, why did they use the short term govt bill yield as the risk free rate but not the long term govt bill yield?
and also in the same topic test, why do you have to add the restructuring charge to core EPS rather than subtract?
May be I just can’t think properly right now…
A short term treasury yield may be considered as a risk free. Remember explanations in later topics. Long term bond has uncertainity and greater risk.
You add it back because XYZ, Inc simply excluded those charges from EPS.
But I remember I’ve always used the long term govt bond rate for risk free rate since day one.
Fama-French empirical study is based using 1-month T-bill, so you must use the Short-term yield provided. The pastor model (the extention of FamaFrench) also uses the short-term yield. The other models we know use the long-term yield.
They also mentioned investment horizon to determine similar gov. bond maturity YTM as a RF proxy.
Otherwise, I’ve checked above statement and Harrogath is right about FF model and applicable RF.
Thanks
I had the EXACT same questions! Thanks for making the long/short risk free rate clear.
Re the structuring charge, I’m still confused. I estimate next year’s E/S = 3.6 * (1 + 0.08 * 1.15) = 3.93. This is the expected EPS regardless of restructuring charges. I can understand subtracting the restructuring charge of 0.08 to get 3.85, or even leaving it out of the calculation to remove non-recurring charges, but adding it confuses me. Does anyone know what I’m talking about, able to clarify my confusion?
Yeah I wonder about the Restructure charge as well. All I can think is they calcualted growth with that reduction, so you need to add it back in.
Thanks Jsnazz. Anyone else re the restructuring charge?