I think I am burnt out for the day reading 150 pages of the Asset Valuation and Equity book. I am trying to understand franchise value, what its used for, and the equations that accompany it eg: FF= (1/r) - (1/ROE) Growth Factor = g/(r-g) For some reason this just looks French to me and I don’t think my stomach can take any more caffeine. I also ran a search but I could not pull up anything of use. It may be that the CFAI text is too wordy. Thanks for the help.
Franchise value is the PVGO, basically all growth opportunities discounted Tangible P/E is the regular P/E without any growth whatsoever = 1/r intrinsic p/e = the above combined = 1/r + pvgo/e = tangible p/e franshise value p/e for example, take mcdonalds, if they had no growth plans their intrinsic p/e would be just 1/r, because they have growth plans (including the espresso shops and whatnot) they also have a franchise value p/e = pvgo/e one thing I dont know is whether Franchise Value P/E -s PVGO/E or is it PVGO/E1 ??? there are two readings in the CFAI LII texts and both contradict each other , one says E other says E1
I have read only to reading 40 and have only seen E1. Which reading has E0? So if I understand it right, this whole thing is similar to the decomposition of ROE using the Dupont Model. Franchise Value (intrinsic P/E) is separated into a tangible P/E = (1/r) and a Franchise P/E (PVGO/E1). The Franchise P/E is then decomposed further into a Franchise Factor (ROE - r)/(ROE x r) and a Growth Factor g/r-g In the end you get (1/r) + (ROE - r)/(ROE x r) x g/r - g or . . . (1/r) + Franchise Factor x Growth Factor So all of this is a decomposition to see how big a role growth is compared to its tangible P/E? I’m lost still.
yep exactly, just taking apart a regular p/e , im not sure where the E0 is, but i know i saw it somewhere in LII…
Ok, after looking at this again, I am starting to see it make sense. If r is > than ROE you end up with just the tangible P/E which = its Intrinsic P/E. The greater g or ROE is, the greater the Franchise Value (Intrinsic P/E). Also, a certain portion of the P/E is basically known due to a required rate of return and your P/E is increased due to taking on positive NPV projects that have a rate of return greater than r.
viktorv Wrote: ------------------------------------------------------- > > one thing I dont know is whether Franchise Value > P/E -s PVGO/E or is it PVGO/E1 ??? > Is this a trailing vs. leading P/E issue? Can you even have leading or trailing Franchise P/Es?
I assume you can calculate a trailing P/E but it does not really mean anything. Since a Franchise P/E is the Present Value of Growth Opportunities, it only makes sense to calculate it using expected numbers and not historical.
I might be missing something basic here but why couldn’t you use historical figures as the basis for the PVGO? I mean, a trailing P/E uses earnings in year t while a leading uses earnings in t+1. So if we break it down the only real difference is which ROE you would use (historical ROE, beginning period ROE, ending period ROE, average ROE, future ROE).
page 151 in equity it says E1 and that is what I will use, this concept is brought up again in 44 but I dont remember them mentioning anything about E0, in last year’s equity book they actually had conflicting info, in one reading it was E0 and E1 in another!