Look at CFAI Volume 4 Page 325. Equation 12: V0 = E1/r + PVGO
I’m a retaker for sho use e1 and bv 0
the show NY Wrote: ------------------------------------------------------- > Look at CFAI Volume 4 Page 325. Equation 12: V0 = > E1/r + PVGO They have assumed that E0 = E1.
I remember a few months ago retakers (the ones you should listen to i.e. cpk) were claiming that you should be using E0) idreesz: when is that assumption not present in this calc? the whole point is to separate a no growth componenet and a growth componenent of value
cpk is a retaker? I thought he was a genius robot.
E0 = E1 when in perpetuity and RE’s paid out
and when is it not the same? then do you use e0?
E1 = E0 since it is a no growth assumption I was really upset when I learned I got this question wrong. It was a matter of conceptual understanding versus mechanics.
same thing happened to me. totally fair question - typical CFA question where you can understand the concept, but on test day get turned around and not think it completely through.
Reggie Wrote: ------------------------------------------------------- > cpk is a retaker? I thought he was a genius robot. He was that way last year too. Speaks to how crazy this exam is. It’s knowledge + randomness + luck.
- If E0 = E1 then why were the two numbers different on the exam? 2) If the two numbers are different which one do you choose?
^this
Nooooo… I still have bad dreams about this, and I’m taking level III in a week. think there was a 10 page thread on this topic day after the exam last year.
Think about it logically… If I discount a cash flow, I bring it back to the previous period. Therefore, if I discount a cash flow that occurs in time 1, I bring it back to zero. If I discount at time zero, I bring it back to “time” negative one. The problem is that I think the concept of no-growth earnings is what threw people off.
muffin09 Wrote: ------------------------------------------------------- > Think about it logically… > > > If I discount a cash flow, I bring it back to the > previous period. > > Therefore, if I discount a cash flow that occurs > in time 1, I bring it back to zero. If I discount > at time zero, I bring it back to “time” negative > one. > > The problem is that I think the concept of > no-growth earnings is what threw people off. Your point is well taken, but consider the following scenario: E0 = 1 g = .05 r = .1 E1 is not provided, so E0 = E1. We should not grow E0 by 1+g because we are using a no growth assumption. That is the trick.
Ah yes Bpdulog, I completely agree. We should never compound a “no growth” earnings figure, tricky tricky CFAI. Kind of similar to using nominal return in a flow through P/E.
How exactly was the question phrased on the exam? If anyone can remember…
bpdulog: on the exam last year, was e0 and e1 both given as different numbers, or was e0 and a growth rate given and the trick was to not multiply e0 by 1+g?
Growth is reflected in PVGO. So use E that doesn’t reflect growth (Unit Root, lol). There is no hard rule to use E0 or E1, just use the one that represents no-growth value.
ok that makes the most sense. the no growth earnings can be e0 or e1 or e5 for that matter. like if they give e5 and a growth rate, you wouldnt discount it back 5 periods. just find whatever earnings they say is the no growth earnings and use that as the numerator. i think i finally got it after 359 days.