In the practice questions of Dividend Discount Valuation, question # 8 section C (pg 275) calls for calculating the PVGO.
The answer shown is using E0. Why isn’t E0 grown to E1 and then used to calculate the PVGO.
The formula shown in text is V = E1/r + PVGO so i’m confused.
When we calculate PVGO we assume that company distributes all of its earnings…Right? So how a company can grow when it is not reinvesting anything??
thats Why Eo=E1 or Eo(1+00)
Simply we just calculated the perpetuity and subtract it from the current price we get the PVGO.
hope it helps.
In a PVGO calculation, the value is decomposed into the non-growth portion (E0 = E1 = . . . = E_n_) and the growth portion (PVGO).
It sure just works like a perpetiuity. Thanks for the explanation!
Hey, quick question for you all - when calculating PVGO do you use the current market price or your intrinsic value that you calculated by another method? I’ve seen both.