Equity - DDM - EOC Question 26

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cipherap15

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States in point III taht the growth rate declines linearly from 14% in the first year to 7% in the ninth year. Finding Vo using the H model technique.
In the answer it uses 4 for H. WHY? Doesnt that mean it would take 8 years to decline to the new 7% rate. I used H = 4.5 and my answer was wrong (I’m thinking 9 years for the decline)
Whats going on? Thanks
 
There are 8 years from the first year to the ninth year:
  1. Year 1 to year 2
  2. Year 2 to year 3
  3. Year 3 to year 4
  4. Year 4 to year 5
  5. Year 5 to year 6
  6. Year 6 to year 7
  7. Year 7 to year 8
  8. Year 8 to year 9
 
Maybe I’m just having a slow week mentally but the question says:
The growth rate would decline linearly from 14% IN the first year to 7 percent in the 9th year.
The first year is from t = 0 to t = 1 and not from Year 1 to Year 2 (this would be the second year)
And we also know it’s an H model so it has to begin from t = 0.
From this year 9 is from Year 8 to Year 9.
Thanks,
 
I think it’s just a poorly worded question. In the first year must mean from t=0 to t = 1 because it’s an H model. It could start from t = 1 if it was a three stage model.
I think when it says TO 7 percent in the ninth —> I think it means to the beginning of the 9th year which is the end of the 8th year.
Opinion?
 
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