Exams2_Exam1_question 34

CFA Level II
#1

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

#2

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.