Unreasonable answers

[Kyle Smith]

In question 1 one of CFAI PM Mock vignette Yee, the sustainable growth rate is 14.7%, I have a problem with this answer not because I don’t know how to calculate growth rate, but the number itself doesn’t make sense.
A sustainable growth rate several times bigger than actual GDP of a nation is absurd, that means the company will grow to take over the country and eventually, the world. It makes me hesitatant before clicking on the check box because I trust CFAI wouldn’t make such a logic error when designning it, and there has to be some traps out there somewhere I didn’t spot, it makes me doubt my own judgement.
Can they make sure the answers are close to reality?

 

[bfry]

I think you are thinking about it to hard. The SGR is calculated as ROE x (1-Payout Ratio). End of story. In theory, by a firm keeping its capital structure constant, they could always grow at this rate.
Now in the long run growth cannot exceed GDP forever because that would just mean eventually this company would become all of our GDP, etc. This is well outlined in the Econ material. However if they wanted us to just know this fact and ONLY abide by this rule then they would never ask this question or if they did the answer would ALWAYS be GDP growth and there would never be another need for any other formula or us to use any other growth rate in any other model besides this.

 

[biuku]

It’s a Chinese travel company.
For one, GDP is growing over 7%.
For another, travel is out of reach of the poor in developing nations. China is generating a city’s worth of newly middle class citizens daily. McKinsey calls emergence of China’s middle class “explosive”. “Should all this play out as expected, urban-household income will at least double by 2022.”
According to the Internationa Association of Air Travel: “Asia Pacific carriers recorded a demand increase of 8.2% compared to 2014, which was the largest increase among the three largest regions.
I don’t know how you could believe that projected growth for a Chinese travel company would 3.1%, or some other non-thermonomic figure.

 

[bfry]

biuku wrote:
For one, GDP is growing over 7%.

Yea right. Don’t believe everything you read. What are the real GDP figures coming out of China????? Nobody knows but the Chinese gov’t. and they ain’t telling. It’s certainly not 7% - otherwise why losen monetary policy, change reserve requirements, etc.
I think in one of the FRA reading it says that analysts should be wary of companies that just meet or beat expectations as that could be a sign of earnings manipulation. Extrapolate that to China’s GDP figures……

 

[biuku]

In 1960, China’s GDP was 8 cows.
Now, it has dozens of cities I’ve never heard of (cause they didn’t exist 20 years ago) bigger than Chicago.
8 cows –> that. I think it’s probably growing > 3.1%.