Error in Equity Topics Test #16?

I didn’t look at the problem, just read what u gave me but E1 times 1-Retention rate would give us D1. The only time we multiply the numerator by 1+growth is when it’s a time zero value. So if 5.04 is at time 1 then you’d be right and it should be 5.04. 

I agree the way they set up the problems, made me lose my mind. I spent a solid amount of time just looking at the wrong exhibit.  That said, the answer they chose is definitely correct.
 
Also, before I start my essay, my own question….does anyone know how we should be measuring up to those topic tests? I got 5/6 on that, but it took me oh– say an hour? Please tell me I’m not screwed…

Okay…so here it goes:

I’m not sure if you’re issue is with the E1 or the D(whatever#) they use, so I’ll try to hit both:

E1:  Conceptually speaking (before I get to the shitty part that you’ll laugh over), if you think about the equation, it’s bifurcating the growth portion from the non-growth portion. That means for the nongrowth potion “E/r”, E1=E2=E3=E4, you get the point. I hope that clarifies that portion.

Next, the laughter. If you re-read the question, it asks about Stack’s question. Now if you re-read the essay, you’ll note that he’s concerned about the blah blah blah “in 2019 when the perpetuity growth period begins.”  When I said “laugh” I meant let’s just all make a pact and jump off a cliff if this is how these mediocre-lived examiners plan to fail us. Back to the story, now if you take that sentence, pair it with this 6-year H-model, and count on your hands when the perpetuity begins, you’ll note it begins at the start of 2020. So yes, you are right if they expected the earnings in 2019 to be “E1” then the dividend calculation for PV at the beginning of 2019 would be “D1” or whatever you’d like to call it. But, given the CFAI has implemented a test of finger-counting abilities, you need to add additional year, so that’s why they are multiplying it once more by the growth rate. The growth part grows…so D1 doesn’t equal D2, and so on.

SIDE RANT:
The best part of this set though has to be Q5, where after several questions of disregarding the only true concept that g=ROE*retention, we now are supposed to realize that Stack has taken up that approach? And Stack was somehow concerned with a 2019 growth rate of 5%, but totally chill with a 2023 rate of 12%. Solid CFAI, solid.  And worse, for the first 5, the clown that made this set thought we should be tested on an equation that literally disregards the very core of time value of money and replaces it with a “guesstimate” which by the way you can’t even do in your head, i.e. what guesstimates are for– Love when finance people use things they should not dabble with. The answer to any question considering an H-model as a superior model must not be aware of spreadsheets. If we can do 3 period, why the hell do we start needing to do estimates for 4+. Is there no trust that after testing us on 3-period models, we probably know how to do any # of periods, and also probably know how to use a computer?

P.S. When I said laughter, I meant serious reconsideration of what society I’m trying to become a part of.

@spatel15- I love love your rant!!! I just finished working on that specific problem you’re talking about and went crazy counting the years and got completely confused between the 5% and 12% growth rate. I was thinking profanity probably as much as you did! LOL! That question tested my ability to find information in a gnarly arranged senseless reading and not so much on Equity. I agree with you 100%!

I’ll review the actual problem once I get out of work but, fyi, I’ve gone through most of those CFAI topic exams and they’re all of low quality IMHO. I understand why you’d want to do them obviously but I think those same ones have been up there for years and aren’t very representative.

Sorry I forgot about you! 85-90 on the schweser bank is outstanding for a first time around but your right they are easier. Item sets are a whole skill in itself to tackle. Get Schweser Mock exams, volume 1 and 2 and bang those out. If you can manage 75 to 80% on those I’d put my money on you. If you want even more try wiley mocks or adaptprep.Com (I use them) along with kaplan. I’m also heading up to windsor week tomorrow. The CFAI EOC questions are a must in my opinion. I for one, am not a fan of their topic exams online. They seem weak. Not easy just of low quality. 

Most of their questions, and most third party vendors, have item sets with information that make no economic sense. I do not fault them for this. If they had to create realistic life scenarios for every question it would take forever. This is a reason many “smart” people cannot pass these tests. They are their own worst enemies, over thinking every question, and pondering for an hour over why the item set says the current exchange rate is 3 euros per USD. Some candidates will literally be trying to recollect what is going on in the news that would have caused this. Its sad, I know. The true reality of the society is that they just want to make sure you understand the concepts. Who cares about the numbers. Anyone can replace one number for another. 

You’re right. That’s an issue. My last comment was at your claim on how unrealistic their inputs are in questions.  

On this issue,  it’s E1. Even with no growth, it’s still E1. Why because with no growth E0 is E1 😉 Algebraicly it has to be that way.