Why is the persistence factor in residual income approach lower when there is high return on equity? shouldnt the persistence factor be higher (closer to 1, which makes the PV of continuing RI higher). when you have high ROE? High ROE means higher growth, greater ROE-RR…
Because ROE is high now… so in the Long Run … ROE and R will eventually meet… High ROE increases BV of the firm which is going to have a large impact on the cost of Equity…thus over time, this should decrease your RI…
ic…well if you put it that way shouldnt low dividend payouts be associated with lower factor also? low dividend pay outs increase BV of your equity faster also.
I would assume that to be correct… that makes sense to me… Anybody else have any input on this??
assuming you hold your cost of equity constant, yes lower payout does increase your RI however when you have a lower payout, you have to increase the cost of equity (I think) so it depends on which factor changes more.