Grinold Kroner Model .. Confused?

[Bilal]

Is the formula:
If the formula in (D1/P0 - Change S ) + (i+g) + Change PE
and change in S is a negative % then why would they still solve it this way:
D1/P = 4
Change in S = -0.5
Answer : 3.5 .. wtf? should it be 4.5 since its - and ( - ) x ( - ) = + ?
Sample 2009 Question 5 part A.
Can anyone explain please?

 

[rahuls]

I have memorized it this way to avoid confusion:
GK Model
Expected return on security = Income return+nominal earning return + repricing return
= DIV1 / Po - change in S + i + g + change in PE
Look for ques. if repurchase yield is given instead of change in no of secuirites i would simply change the above formula with + change in S & would look at the sign of repurchase yield
As in this question repurchase yield is -ve
Income return = 4 - 0.5 = 3%

 

[cpk123]

instead of memorising as above …
Delta S in the formula - is Change in # of outstanding Shares.
When repurchase yield is provided and is positive -> it means that due to some action by the company the yield increased. That could only happen if the # of Shares DECREASED because the company BOUGHT BACK its shares. So DeltaS is NEGATIVE. So -(DeltaS) will be positive.
When Repurchase yield is NEGATIVE -> it means company ISSUED SHARES so the change in number of shares is POSITIVE. So -DeltaS is NEGATIVE.

 

[rahuls]

^ thnx cp. It helped
With 19 days left & so much content to revise & remember …i somehow thot to memorise it the above way….

 

[mcap11]

if shares go up = bad for expected return, so it is subtracted in formula
if shares go down, good for expected return, so it is added in formula
a negative repurchase yield means shares increase = bad for E(R) = decreases E(R) in formula

 

[itera]

^ this is what i go by as well

 

[tulkuu]

2009 AM Q5.A
Repurchase yield: -0.5%

 

[ImmunizeThis]

positive repurchase yield = decrease in shares outstanding

 

[Bilal]

=) thanks