In topic test, Equity- Alahtab 13 of 17
Question 1:
According to Gordon growth model, calculate CRN’s value per share using 2013 sustainable growth rate as dividend growth.
In the answer, it use (Net Income in 2013 )/(equity in the end of 2013) to get ROE in 2013 to calculate growth rather than using beginning equity.
Why it use end of year data? When we are calculating justified PB ratio, the ROE in the formula is NI(1)/B0. And I just went through CFAI, I saw this paragraph,
" Theoretically, the sustainable growth rate expression and this expansion of it based on DuPont decomposition of ROE hold exactly only when ROE is calculated using beginning of period shareholder equity…Analyst prefer tl use average total asset in calculating ROE… "(pages 241)
So I think that to calculate ROE, we either use beginning yr data or average equity, but never end of year data. So is the topic exam’s answer wrong?
Also for another question in Topic test Equity - Pacific World (14 of 17) Question 6
The Answer said that the statement “When inflation rates are same in two countries, the justified PE should be lower for companies with higher inflation pass-through rate” is accurate. However, isn’t this statement wrong? When company has higher pass through rate, its PE should be higher. Is the answer wrong again?
Thx