Residual Inc Model Question

CFA Level II Equities
#1

Hi all,

Something bothering me about question 28 from the cfa website mock exam (afternoon section) on residual income model

For coming up with a value for stock at time t they are valuing the stock as perpetuity using the long term growth when there are much higher growth rates between now and when the long term growth rate kicks in.

Should we not make this a multi step model to account for the changes in the growth rate, I don’t believe this is fundamentally correct but could be way off.

Any help is greatly appreciated.

#2

I also was very confused by that. I’m not sure how they expected you to infer that we should use the single stage model even though there were multiple stages of growth.

#3

Same here. Couldn’t solve that one because I wasn’t sure to assume that we have to use the long-term growth rate.

#4

Right? And then when you began to try to forecast RI for each year and realize that solving this problem will take forever