# CFAI AM Mock Q#46- PVGO

Question 46 asks for the PVGO in 2019… I calculate the price from the DDM and set up the equation… perpetual growth rate = 5%, 19 EPS= 5.04, div payout ratio= .40 21.17= (E1/r) + PVGO… I used the 2019 earnings * 1.05 and solved from there. The answer uses the 2019 earnings and says “Value of no-growth level perpetuity in 2019- All EPS paid out as dividends” … where the h**l did they get that from? Where does it say anything about no growth?

bump

For value using PVGO, you are trying to break up the valuation into 2 parts - a growth portion and a no-growth portion…

Valuation = (No Growth Portion) and the PVGO portion…

V = (E1/r) + PVGO…

The No Growth portion is the (E1/r) part,

Whatever is left over is attributed to the PVGO or the “growth opportunities” that the firm can capitalize on in the future…

I dont remember the question off hand, but usually you are given V (or P) and E and r, and therefore solve for PVGO… or you may have to solve for V first using GGM (if given g, r and D), and then see which portion is attributed to the “no-growth” portion - the perpetuity, and which is attributed to the “growth part” - the PVGO.

Hope that helps…

even though its says Et1 in the formula… its the same as Et0 because g=0

but where did you get g=0 ?

They give you a growth rate in the problem, and some of the online assessments use the growth rate to move E0 to E1 (conflicting methodologies, maybe?). Either way, only one answer comes up in this particular question…

you do two calculations

1. normal DDM answer = 21.17
2. “modified DDM” where g=0… just remember that.

the difference will be PVGO

the idea is that if the company pays out all earnings EPS=DPS, it cant grow*, g=0 EPSt1=EPSt0 (every year it earnings 5.04 and pays out 5.04… IN THIS CASE because r is (so high) at 15% the company is worth more with a payout ratio of 100% \$33.60 compared to \$21.17, if the r was low like 6%, the PVGO would be a positive number because “the company would have more opportunites to use internally generated funds to create value”-my own thinking

OK… I see the Mendosa CFAI #2 uses E0*(1+g)… g=15%

the difference is that inf the CFAI question… it clearly states that the company is growing, but in the answer key its says in the case that it doesnt have anymore positive NPV projects?? IDK… if this comes up… you need to look for clues in other info i guess and see if both answers are choices>?.. the CFA exam will be perfectly worded and if the question is too ambiguous they will throw it out an based on statistical analysis of the results…

look at EOC #8b in R33

The calculation and idea aren’t the issue. The fact that the methodology in this question conflicts with the methodology in one (PVGO) question in the online assessments is what concerns people (there have been a few threads on it). In the other question, they take E0*(1+g) to arrive at E1, and then treat that as a perpetuity. In this question, they use E0, which should equal E1, if there is no growth (as you said). In either problem, I didn’t notice anything in particular that would tip you off to say E0 doesn’t equal E1…

only difference i can see is that the mock just says “growth rate will be 5%” and the CFAI question says “earnings and dividends will grow”… maybe its a more explicit meaning of g