# Equity-Mendosa

Can anyone please confirm if the answer for question 6 is correct?

I calculated the same way as the answer suggests.

You have for year zero the NI BV and r to calculate RI for year zero.

8 - (.124 * 20.97) = 5.4

This will grow by 15% for 5 yrs:

5.4 * (1.15^5) = 10.86

This is a perpetuity discounted by 12.4% to TV in year 5, which discounted back to present by 1.124^5 gives 48.82

Question for you, when you take the final residual income, which is 10.86 and divide by the discount rate, isn’t it give you t4 value? Then you discount that back 4 years. Please let me know

This is an issue for me too in many cases.

How I figured out is the following: RI grows supernormally for 5 years, so the 5th RI is the 10.86.

Then I calculate the terminal value for the year of the last supernormal growth which is T5.

Because from then on there is no growth, the RI6 is the same 10.86. (In case we had a second stage of growth then the RI5 would be multiplied by 1+second stage growth).

So for me 10.86 / 0.124 is the TV at time 5.

But I agree it can be confusing.

Can you please take a look at the blue box example in scheswer? It is in residual income chapter, the blue box is about Calculating value with a multistage residual income model. They have a similar question like this and the amount go to T4 and then they discount back by 4 years.

I see what you mean. I have been through this at level 1. CFAI and Schweser calculate these multistage stuff a bit differently giving the same result less rounding differences.

I go with CFAI because it’s more logical to me.

The way I solve the Schweser BB cited by you:

BV0 = 5

PV of the 5 years of supernormal stages = .25, .29, .33, .38 and .44 discounted back to zero with 10% equals 1.274

Then comes the last stage. RI in year 5 is 0.44 so I calculate the TV for year 5 (last year of the supernormal growth as I explained in my previous comment):

0.44 / 0.1 = 4.4 this is the TV5.

I discount it back to present by 4.4 / (1.1^5) = 2.73

Adding together the PVs of the 3 stages: 5 + 1.274 + 2.73 = 8.98 equal to Schweser’s way of calculation.

This way is one extra step but it is clearer to me.

i do agree that your method yield the same answer

Hi Mosey, Thanks for a great explanation.

I am currently struggling with this, and was referred to this post.

I have been doing the Schweser way. Are you here simply thinking that the perpetuity starts in year 6. And since RI is not growing anymore CF5 = CF6? Hence why you discount back by 5(T-1) ?

[quote=“Thammer”]

Hi Mosey, Thanks for a great explanation.

I am currently struggling with this, and was referred to this post.

I have been doing the Schweser way. Are you here simply thinking that the perpetuity starts in year 6. And since RI is not growing anymore CF5 = CF6? Hence why you discount back by 5(T-1) ?

I guess my main issue is understanding when the Terminal Value starts. In the TT I would have believed the Terminal Value was to be calculated based on the RI in year 5. In the Schweser example they are calculating the terminal value based on the RI in year 5. Is there anything in the wording to look out for?