Hi,
I’m preparing for June 2014 CFA Level 2 exam with Schweser Notes 2013. I found that the PVGO formulas in Curriculum and Note are different.
CFAI Curriculum: V0 = E1/r + PVGO.
Schweser Note: V0 = E0/r + PVGO.
I don’t know whether the difference repeats in Schweser 2014. So, anyone use Schweser Notes shoud notice that.
The first term in the formula is the value assuming _ no growth _: E1 = E0.
It’s annoying that they aren’t using the same notation, but the formulae are, in fact, equivalent.
Hi S2000magician,
I think like you do at first. But after reading carefully, I found the concepts are different. Schweser Note assumes E1 = E0, but CFA Curriculum doesn’t. So, we should remember to use E1 for the first term in exams.
The true notation is e1 instead of e1. Schweser 2014 use “E” in their fomula but in example and practice question they use E1.
And most importantly, CFAI is the standard so E1 is the correct use!
This is not new. CFAI also alternates between E0 and E1.
http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91156220
How about if we agree to use E½ and be done with it?
For the practice set (“Equity Mendosa”)on the CFAI website they use this:
Using the PVGO and assuming that the company has no positive net present value (NPV) projects, the PVGO Model is:
Why would we multiply E0 with (1+g) here if we assume no growth? The dividens and earnings growth for the next 10 years is set at 15% - but is this not reflected in PVGO?
According to the CFAI’s PVGO model, PVGO is the pv of growth opportunities in the period after year 1. I don’t think it’s logical, E1 should equal E0. But CFAI’s concept is to use E1 = E0 x (1 + g) in this case. We should remember that for the exams.
Completely agree, this doesn’t make sense to me either when looking at the Mock.
Andy Holmes went over this in the video explanation to one of the Schweser Live Mock questions. He specifically states that it should be E0 x (1+g) and he even points out that this contradicts the no growth assumption but thats what you use anyway.
I’m glad I saw this… Was so confused after seeing what was in the Mendosa Mock Q vs Kaplan formula…
Technically it doesn’t matter because the equality E0 = E1 should hold in a no growth scenario.
However, what I’ve come across in mocks is the usual CFAI tricking you, and E0 != E1. CFA will make you go 1-more period forward before you’ve hit no growth. I did a PVGO mock question and used the labeled terminal EPS, but when I got to the answer they grew the terminal EPS 1 more year before considering no growth.
Very counter intuitive on CFA’s part.
If I understand the concepts correctly (which I probably don’t), then it’s less of a trick and more just wrong.
I thought the whole idea is for the PVGO term to capture growth opportunities. Ah well…
Just remember - there’s the right way, the wrong way, and the CFA way. The CFA way is the only one that matters for the exam.
The text gives the reason: “E1 is t = 1 earnings, which is the constant level of earnings or the average earnings of a no-growth company if return on equity is viewed as varying about its average level”
Sorry to bump, but now the CFAI material uses $5.33 (NOT $5.33*1.15) in the Mendosa problem. Does anyone know what changed? 