Reading 39: NAVPS

[aerodynamik]

Q1:
In the example on page 53, when calculating the NAVPS, Schweser take non cash rents from NOI and then capitalise using the cap rate. On another example on page 56, they don’t take non cash rents from NOI when calculating NAVPS. WTF?
Q2:
In the same example on page 58 they get the present value in 2016 of all future dividends by dividing the 2017 dividend by (required equity return - risk free rate). Where has the risk free rate come from? Why isn’t it (required equity return - growth rate)?

 

[S2000magician]

aerodynamik wrote:Q1:
In the example on page 53, when calculating the NAVPS, Schweser take non cash rents from NOI and then capitalise using the cap rate. On another example on page 56, they don’t take non cash rents from NOI when calculating NAVPS. WTF?

The example on p. 53 starts with Last 12-months NOI, while the example on p. 56 starts with Estimated cash NOI; it sounds as though the non-cash rent is already deducted from the starting number in the latter.

aerodynamik wrote:Q2:
In the same example on page 58 they get the present value in 2016 of all future dividends by dividing the 2017 dividend by (required equity return - risk free rate). Where has the risk free rate come from? Why isn’t it (required equity return - growth rate)?

I suspect that the 2% is not the risk-free rate, but the 2015, 2016 dividend growth rate; it appears that they mistakenly used that growth rate instead of the 2017 and beyond rate.
I’d suggest checking the errata on that one; if there’s no erratum for that page, I’d encourage you to contact Schweser and let them know.

 

[aerodynamik]

Yeah I understand the first one and I think the errata covers the second one. Cheers. However I’ve seen the same issue in the CFA questions too. Reading 39 question 4 gets the terminal value by dividing by (required equity return - risk free rate) and in question 12 they divide by (required equity return - growth rate). I couldn’t find any mention of this is in the CFA errata. Any ideas??

 

[kobi]

Aerodynamik, in the examples you quited risk free rate = growth rate. Everything is correct. Thus, denominator = re - g.

 

[aerodynamik]

Yeah I’ve got it. Cheers.