AuthorTopic: Rounding on Divident Discount Model
Webdude
@2010-07-05 08:28:38
Since DDM is soooo sensitive to its inputs, what type of rounding should I do?

I was doing a ddm practice problem and I noticed that I got a different answer than the problem's answer. Then I noticed the difference:

Do= 0.35 with g=.28
my D1 = 0.35*1.28= 0.448
their D1= 0.45
.... my Terminal value is 0.734 * 1.12 = 0.82208
.... their TV = 0.74 * 1.12 = 0.83

I didn't think this would really affect the answer but it way does...

0.82208/(.1255 - .12) = 149.46974
vs
0.83/(.126 - .12) = 96.89

This is a big difference. When I get the PV of the TV, The end result is that I am off on this problem by about 9 bucks.

Should I always leave things unrounded till the end or should I always round to 2 decimial places?
Midal
@2010-07-09 10:09:31
I've seen in some questions an instruction on how many decimals should be used for calculations.

CFA Discussion Topic: Rounding on Divident Discount Model

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Craig Baugh

Craig Baugh