Equity - SMGI

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kychoo

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Question 5 - shouldn’t we be using the H Model here given that there are two growth speeds?
 
Nope. The H model is used when growth declines gradually from High to Low. When growth immediately drops from high to low you use the standard two-stage model. In the vignette, it says growth will “drop sharply” due to intense industry rivalry.
 
By the way, I noticed a mistake in that topic test that I didn’t catch when I did it originally. In the answer to number 3, they list the PVGO calculation as V0 = (E1 / r) - PVGO. That minus sign should be a plus.
 
Question 3 - why did we use CAPM r(e) instead of the company’s given r(e)??
 
Question 3 - why did we use CAPM r(e) instead of the company’s given r(e)?? to calculate PVGO?
 
It’s the same
r(e) = Rf + Beta(Mkt Risk Premium) = 5% + 1.35(7.1%) = 14.585% (rounded up to 14.6%)
 
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