CFA Practice Question
Since D/P = (r - g) / (1 + g), and P/CF = (1 + g) /(r - g), therefore D/P = CF/P. True or False?
Correct Answer: False
The g in the P/CF formula is the expected growth rates of future cash flows, not the dividend growth rate.
User Contributed Comments 8
| User | Comment |
|---|---|
| HenryQ | Good question! |
| ikaneng | which also means that if the 2 g's are equal, then D/P = CF/P? |
| gnacinka | dividend is a kind of CF, but different that they mean |
| NIKKIZ | Mathematically, 1+g/r-g is not equal to r-g/1+g... |
| NIKKIZ | Or am I incorrect? |
| sogah | very good question lol |
| endurance | KA-boom ... very useful for understanding the concepts |
| JMBrown | NIKKIZ,1+g/r-g is P/CF and they are comparing D/P and CF/P using the reciprocal. So it would actually be D/P=r-g/1+g and CF/P=r-g/1+g only with varying definitions for g. |