Exams2_Exam1_question 34

2013_CFA_Schweser_L2_Practice_Exams2_Exam1_question 34 page25…

Using the PVGO, why did they grow earnings? i thought when calcaulting PVGO we leave earnings constant and divide it by the cost of equity?

Thanks,

BA

there was another thread about this (about using E0 or E1)…i think the conclusion was you have to use the Earnings that is constant in the forseeable future. I think what makes this question misleading is they say growth will slow down after 8 years. Remember, since you are basically applying a cap rate to the E portion, its going in perpituity…so I guess they are assuming 8 years is long enough to say its growing at 30%.

I guess I wouldn’t get too hung up on what they did, just know you might use E0 or E1, whatever represents constant future earnings.