I understand the way to find out PVGO, but the why would the answer showing E1 = $5.04, while D1 = $5.04*(1.05)?
The part of “value of no growth” will be brought back to the beginning of 2019 (T=0), while the “Value” or “Price” will be brought back to end of 2019 (T=1) based on the DDM.
Thanks, I was thinking I was becoming crazy. Since we are given the 2019 EPS, to calculate the PVGO we should use the 2020 EPS. Unfortunately no erratum for Mock exam on the CFA website it seems ;). Has someone another explanation ?
If there is no growth, that means all the earnings would be given to the shareholders and there will be no reinvestment. If there is no reinvestment, there is no growth
That implies the value would be EPS/cost of equity i.e. 5.04/0.15 = 33.6. As there is no growth EPS would not grow in 2020. it will remain the same.
If they want to grow, they have to reinvest, that implied they give 40% as dividends and reinvest the rest 60% for growth.
In that case the dividends paid would be 0.4*5.04 = 2.016
This wil grow as perpetual growth rate of 5%
hence the value would be 2.016*1.05/ 0.15-0.05 = 21.26
So the value of growth is Value with growth - Value with no growth
Just did the AM section of 2015 mock this morning…managed to get 75% so quite happy with that. Gonna do PM session tomorrow then one more mock before the exam (Boston CFA society mock)
I feel like if the “right” questions come up on the 6th I could pass with room to spare, but if too many of the “wrong” questions come up I could still be screwed.
Can’t wait till this is done with…getting sooooo bored of this sh!t right now.