PVGO -E0/E1

CFA Level II
#1

This is one of the most asked questions on AF but there does not seem to be a clear answer on the threads.

Specifically we are looking at Q 8C in CFA Equity EOC (P250)

The question says the company had an EPS of $2 in 2008. G = 8.4% and the value = $33.35. Calc PVGO.

EDIT: One other statement in Q says 'assume all dividends are paid at the end of the year’

Solution suggests E0/r + PVGO. So 2/0.11 + PVGO = 33.35

As the company had an EPS of $2. Would we not grow this by 1.084 to get E1. Thus, 2.168/0.11 ?

Thanks

#2

Because of the no growth component of the equation, EPS would not grow. Intuitively, if a company is paying out 100% of its earnings and dividends, earnings would be the same each year. So E0 = E1

#3

Wouldn’t that then mean E0 = E1? If that’s the case why would the formula specifically state E1 as the numerator?

#4

I e-mailed CFA Institute about this last year and they finally agreed that it should be E0, and that the questions that used E1 (= E0 × (1 + g)) were incorrect. I thought that they’d have the corrections in the errata by now, but perhaps not.

In any case, E0 is correct.

#5

Cheers S2000

#6

Being E0 the correct one helps a lot the intuition. This method supposes the separation of a non-growth component ( E0 / r ) from the PVGO component that captures all the growth opportunities. LoL, this is hilarious.

#7

I again ran into a question where the official answer is E1/r and not E0/r.

This is topic test ‘SMGI’ on CFAI portal.

Is this AGAIN a mistake, or in this case it is me who is overlooking something?

#8

E0 is the correct one.

#9

It’s been a few months since I first did SMGI and I just did it again and the stupid E0/E1 caught me again and I got it wrong. I am kinda surprised this issue is still going especially after you emailed the CFAI and received a response about this. The big question is what do we do if the answer options given on Saturday have the result if E0 is used and if E1 is used?

#10

I don’t know.

Assume that they won’t and concentrate on other things.