Page 33 - FINAL CFA II SLIDES JUNE 2019 DAY 7
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Be sure, you can compute ROE/SGR from AFS… READING 29: DISCOUNTED DIVIDEND VALUATION
Calculating ROE and SGR: Given the following partial balance sheets and income statement for MODULE 29.3: MULTIPERIOD MODELS
Far Horizons Company, calculate three components of the ROE (using the DuPont model) and
the sustainable growth rate for 2018 based on beginning balance sheet values. Use a dividend
payout ratio of 30%. All values are in millions of USD.
LOS 29.p: Evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
If market price > price implied by a dividend discount model (or other calculated value) - Overvalued! Sell/Go Shot!
If market price < price implied by a dividend discount model (or other calculated value) - Undervalued! Buy/Go Long!
If market price = price implied by a dividend discount model (or other calculated value) - Fairly valued! It depends on portfolio strategy or other factors!
