 # CAFI equity item sets

In CAFI equity item sets;

Stack questions Armishaw’s assumption in his 2014 valuation (Exhibit 2) that a perpetuity would best describe the terminal value of the stream and suggests that residual income should fade over time. Stack further suggests that a persistence factor of 0.50 might be appropriate.

Q. Using the information in Exhibit 2, comparing Armishaw’s approach to terminal value to Stack’s approach, Stack’s assumption leads to a 2024 value that is approximately:

1. \$6.50 lower than Armishaw’s approach.
2. \$6.74 lower than Armishaw’s approach.
3. \$26.30 higher than Armishaw’s approach.
Solution

A is correct.

Difference in VT 9.17 – 35.47 = –26.30 Stack’s vs. Armishaw’s assumptions Difference in PV(VT) –26.30/(1.1510) = –\$6.50 Stack’s estimate will be \$6.50 lower

My question is as follows, it is asking for the terminal value, so why would we discount the difference?

Terminal values represent future values. And if I’m reading this correctly they’ve given you two terminal values and they’re asking you what the difference is in the present value of the stock based on the terminal value.

You are right, This question has a critical typo instead of saying 2024 they should have asked about the terminal value discounted at 2014 , they are asking here about the addition to 2024 terminal value which we would get by the difference at 2024, while the correct answer will be obtained by discounting this difference leading to a change in terminal value at time 0(2014)

I hope that in the exam it would be clearer

Perhaps it’s nothing more than a typo: . . . leads to a 20 1 4 value that is approximately: