Reading 32 - CFAI EOC question #33
I have a question regarding the calculation/timing of the terminal value. I searched through old AnalystForum threads, but could not find a concise answer.
The vignette provides three years of EPS and dividends as well as beginning book value per share. Question 33 asks us to solve for intrinsic value using a multi-stage residual income model. It indicates that residual income per share will be constant from year 3 into perpetuity. Thus the cash flows used to calculate intrinsic value are RI1, RI2, and the terminal value calculated based off of RI3.
This seems a little confusing, as I attempted to use RI1, RI2, RI3, and a terminal value based off of RI4. Is the terminal value calculated based off of RI3 because the problem states that “residual income per share will be constant from year 3 into perpetuity.”
Would be greatly appreciated if someone could help (paging S2000 Magician lol), thanks!
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