I thought repurchase yield keeps the sign when you put it in to calculation. CFAI past exam 2009 Q 5 A I has a repurchase yield of -.5 and its negative in the problem while positive repurchase yield in Q 10 C 2007 exam it’s negative ?
I understand the concept of repurchase yield but when it comes to putting it in the calc - I get confused. Can anybody clear my confusion?
When company repurchases it’s shares i.e. Shares outstanding are reduced ,the yield is positive for existing share holders. Similarly when shares are issued to raise equity capital, then the existing shareholders see a dilution of their interest, I.e. Negative yield. If you look at the problem carefully you will be able to distinguish whether it is a buy back or issue and adjust the sign of the yield accordingly
I wrote an article on Grinold-Kroner that may be of some help here: http://financialexamhelp123.com/grinold-kroner-model/.
magician,
I looked at the article and am clear about the repurchase yield conceptually. But, in the same table given in CFAI past exam 2009 Q 5 A I has a repurchase yield of -.5 ( given in the table as -.5 and its taken as a negatiive in the calc while in the Q 10 C 2007 exam it’s positive ( in the table)1% and taken as a positive in the calc?
Am I missing something here ?
This can be tricky. I sorted it out mentally like this. Think of the first two terms - dividend yield and repurchase yield to be yield from return of capital, whether through dividends or buybacks. The “delta S” is the change in shares outstanding. If the change in shares out is negative, that means there are less shares out, and the company bought back stock. This will ADD to yield, and the negative delta S, in the calc will be - “delta S” where “delta S” is negative, so the “share repurchase yield term” or - “-delta S” will be positive.
If “delta S” is positive, then there are MORE shares out, diluting return, and the “delta S” will just be subtracted as per the equation.
Delta S is not repurachase yield - it is simply the % change in shares out. Hope this helps and doesnt make it more confusing.
KeepOnTrucking,
Thanks for the answer. I’ve pasted the CFAI’s Question and answer. 2009 exam Q 5 A i:
Exhibit 1 U.K. Capital Market Data Historical Data (past 100 years) Equity compounded annual growth rate (%) 11.2 Equity risk premium (%) 5.3 Dividend yield (%) 4.0 Equityy repurchase yield (%) –0.5 Nominal earnings growth return (%) 4.6 Current and Forward Looking Data Current equity price-to-earnings ratio 14.6 Expected equities real earnings growth rate (%) 2.7 Expected long-term inflation rate (%) 2.5 A i. Determine, using the information in Exhibit 1 and the Grinold-Kroner model, the component sources of historical nominal retrurn of UK equities.
Answer: PART A The Grinold-Kroner model can be expressed as: E(Re) = (D/P - ∆S) + (i + g) + ∆PE or E(Re) = Income return + Earnings growth + Repricing return
i. Income return is the sum of the dividend yield (i.e., D/P, which is 4.0%) and the equity repurchase yield (i.e., the negative of the expected change in shares outstanding, - ∆S) which is -0.5%. Therefore: Income return = D/P - ∆S = 4.0 - 0.5 = 3.5%
As per your logic, this .5 should be added right?
no.
Repurchase yield = -(∆S) by definition.
so when they gave you Repurchase yield = -0.5 - you add that number straight in.
cpk’s got it. Delta S is NOT repurchase yield. It’s the negative of repurchas yield. So if given repurchase yield rather than % change in shares out (which is what delta S is), then you don’t do anything with the sign. If the given repurchase yield is positive, then it is adding to overall return. If it’s a negative repurchase yield it’s detracting from return, so just keep whatever sign is given for repurchase yield and add the rest of the terms to get the answer.
The equation is DY - ( change in shares)
If repurchase yield is position, it means you have purchased back your shares thus your shares decreased so change in shares should be negative = > DY - ( - %) but since its negative it means what happened was the opposite of repurchase thus i leave it positive. So you just subtract it from DY.