Equity: Excess Earnings Method - Numerator to have growth?

CFA Level II Equities
#1

Reading 39 - Private Company Valuation - Excess Earnings Method

As per the steps (precise - step-6 on page-558) given in the reading - the numerator should have GROWTH multiplied with Residual Income divided by (r-g).

Specifically, the formula is -

Value of intangible asset = (Residual Income * g) / (r-g)

HOWEVER, in the EOC question 15 solution, GROWTH is NOT considered in the numerator!

The value of intangible asset is computed as -

Residual Income / (r-g)

Which one is correct?

Thanks in advance!

#2

in Q15, the normalized earnings provided are a projection of the forecasted year ahead value, which is what you are looking for (and the practical affect of growing current year normalized earnings).

#3

The numbers are a PROJECTION for following year (so g is already implied). This is btw. a common trap in DDM, FCFE, FCFF etc. as well! Always watch out for the reference year.

#4

When normalized earnings are provided, we still deduct cost of equity only from those earnings to get Residual Income… correct?

or we deduct WACC* cost of total capital?