Question

DCF approach to setting capital mkt expectations (for equities); Grinold-Kroner model and 3 ways it can be grouped

A) Earnings Growth
B) Dividend Yield
C) Change in P/E Ratio
D) Economic Conditions

Answer 1

The DCF approach is used to set capital market expectations for equities. The Grinold-Kroner model considers earnings growth, dividend yield, and change in P/E ratio as factors for forecasting stock returns. Option A, B and C are correct.

Step-by-step explanation:

The DCF (Discounted Cash Flow) approach is one method for setting capital market expectations for equities. It involves estimating the present value of a company's future free cash flows to determine its intrinsic value.

The Grinold-Kroner model is a framework for forecasting stock returns based on three main factors: earnings growth, dividend yield, and change in P/E ratio. These factors can be grouped as follows:

1. Earnings Growth: This refers to the expected increase in a company's earnings over time. Higher earnings growth usually leads to higher stock returns.
2. Dividend Yield: This is the ratio of a company's annual dividends to its stock price. Dividend yield is an important indicator of a company's profitability and can affect stock returns.
3. Change in P/E Ratio: The P/E ratio (price-to-earnings ratio) compares a company's stock price to its earnings per share. Changes in the P/E ratio can impact stock returns, as investors' expectations about future earnings change.