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:
- $6.50 lower than Armishaw’s approach.
- $6.74 lower than Armishaw’s approach.
- $26.30 higher than Armishaw’s approach.
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?