E0, E1 E5 E566006 are all the same if there is NO GROWTH into perpetuity…
How I understand this, if the payout ratio and D0 of T0 period were decided and D0 was paid out (less than 100 %), we should use E1 = E0 x (1+g) because we cannot change past decisions (b in g) and the no growth assumption should be applied to future decisions only
and ding.ding.ding.ding… you would be wrong when it comes to PVGO. There is also a EOC problem where exactly this surfaces - they provide you P0. E0, g and r and ask you to calculate PVGO. both answers P0-E1/r and P0-E0/r are provided… and they specifically tell you the P0-E0/r is the right answer.
CP - Do you know which page and question number this is located in the CFAI text? Just for review purposes …
for what its worth I looked at schwesers qbank on PVGO, all use current earnings E0 unless stated that earnings are fixed in perpituity so E0 = E1 =E1000… in the 2009 books, pg 347 question 20 it gives you current earnings, price, g, r and the answer uses E0/r
Reading 40, Q8©
^ that’s what we were all looking for and i think thats how it was on the exam. confirmed that you use whatever earnings are given, regardless of the year, and do not multiply by 1+g.
I am aware of this EOC question and I think it may not be correct I say that if something (b) is already decided you cannot change this in you calculation example: lets say now we are at the beginning of 2009 (as in the question) last year (2008) BV at the beginning was 100 last year earnings 10, no dividends - this was decided and you cannot change this (assume) ROE = 10 pct (no change assumed) BV at the beginning 2009 = B0 = 100 + 10 = 110 earnings at the end of 2009 (E1) = BV x ROE = 11 = E0 x (1+g) and you calc value of the company and decide what goes to PVGO, but what would be the logic to assume that BV is still 100 if you know that it is 110 and if you look at page 190 (CFAI book 4) franchise value P/E = PVGO/E1 you start with P0 = (E1(1-b))/(r-g) and end P/E1 = 1/r + FFxG and it is still E1 = E0 x (1+g) (the footnote 15 says E1 refers to estimated next year earnings, what is wrong to estimate those earnings by B0 x ROE where B0 is given and includes last retained earnings (E0 x b)) BV does not change but you need to use B0 and no-growth means book value does not change in the future and is equal to B0 in the q8 I believe B0 is book value at the beginning of 2009, which is equal to E2008/ROE + retained earnings in 2008, because we are valuing company at the beginning of 2009 and dividends were paid out at the end of 2008, you cannot change the past CP “ding” where I am wrong 
I have followed up multiple times with CFAI - asking about it being an erratum, and all times have been told E1=E0 => primary requirements for the PVGO stuff. and the part in Q8© that holds out is: a. in the body they give you a Dividend Payout=0.4, Retention=0.6 based on which they make you calculate the Sustainable growth rate. b. But later on in the same question they tell you that company pays NO DIVIDENDS. If company pays no Dividends - the E1=E0… and based on that assumption you calculate the PVGO.
cpk123 Wrote: ------------------------------------------------------- > I have followed up multiple times with CFAI - > asking about it being an erratum, and all times > have been told E1=E0 => primary requirements for > the PVGO stuff. > > and the part in Q8© that holds out is: > a. in the body they give you a Dividend > Payout=0.4, Retention=0.6 > based on which they make you calculate the > Sustainable growth rate. > > b. But later on in the same question they tell you > that company pays NO DIVIDENDS. > > If company pays no Dividends - the E1=E0… > > and based on that assumption you calculate the > PVGO. Hey CP, What if the company paid dividends? Do we have to to make any adjustments, or does the E1 = E0 assumption still hold?
It does not matter if the company pays a dividend or not. PVGO by definition is the value of growth opportunities for a no-growth company - which means E1=E0… to perpetuity.
The Intrinsic value formular 1/r + FF*G is derived using leading Po/E1. so, when you calculate Vo, you multiply E1 on both sides.
watleeds Wrote: ------------------------------------------------------- > The Intrinsic value formular 1/r + FF*G is derived > using leading Po/E1. so, when you calculate Vo, > you multiply E1 on both sides. You’re talking about a different formula bud.
CP is absolutely right. I’m a retaker, and answered last year’s PVGO question by using E1. I was wrong. Yes, I know the obvious. The formula in the CFAI shows E1. But, CP’s right, question 8c in Reading 40 calculates it as E, not E1, just E, which is implicitly E0. Check the answer to it. All in all, THINK about it. Don’t just use a brute formula. It’s the no growth value of a firm (e0/r) plus the PVGO. If we used E1 instead of E0 (assuming you multiplied E0 by 1+g), then you’re taking a part of the PVGO away from PVGO and putting it into the no growth value of the firm… It’s just a perpetuity plus the future growth. That’s it. Won’t get it wrong now.
P or V is value of investment (stock), it is present value of future cash flow future cash flow is estimated cash flow (uncertain) how to estimate e1? e1 = roe x b0 what is b0? b0 is given at the moment of valuing of your investment, you cannot estimate anything about it, no growth means you assume no growth in the future. you assume constant roe b0 includes part of e0 (e0 x b) that was not paid out as dividends (d0 is given too you do not assume anything) if you say that e1=e0 and you assume roe constant, it means you assume d0 100 pct even if only 50 pct was paid out arguing that you got it wrong last year? how do you know? arguing by the answer to 8c question? well i can read and read the question before tell me where i am wrong pls (but dont tell me to read 8c pls) I sent the email to cfai regarding 8c I hope they will explain it, I will let you know
Check Reading 40, question 8D. the solution used Eo, and the explaination assumed there’s no growth opportunity, which is the case, E0 is indifferent from E1.
Any resolution on this and comment from CFAI? The Eo makes most sense to me, but I was just reading Schweser’s Critical Concepts and they use E1/r + PVGO
text also uses E1/r but they specifically state eo=e1.