Persistence Factor

So a persistence factor of 1 means that the ROE wlil continue in perpetuity above r, and persistence of 0 means that it immediately declines? Is that right? I’m getting conflicting reports.

0 means it immediately declines to 0 at T + 1. You still have a value at time T so that you can find T-1 for your terminal residual value

You are absolutely correct. The residual part of equity value is like value of preferred shares, RI_t/r, in case if w=1. In case if persistence factor drops to zero, the residual part is like terminal dividend discounted one time period, RI_t/(1+r).

And is high ROE or high div payout indicative of high persistence? I forget

Low div payout - higher persistence High ROE - lower persistence

low non recurring items - higher persistence

Don’t quite understand these, can someone elaborate further? Thanks.

Low div payout - higher persistence High ROE - lower persistence

low non recurring items - higher persistence

Low dividend payout indicates that management is spending money on capital projects which will increase returns in the future. eg Apple, their paying a dividend was seen as a signal there are no new revolutionary products upcoming.

High ROE without any other explanation could suggest that high ROE this period was an anamoly and company profits will soon revert to average - this is a bit of a gray area for me.

Low non-recurring items would indicate that high profits this quarter were not due to some unusual factor eg jump in income for a Japanese construction company after tsunami would be a non-recurring item, we would not expect this income to persist into the future.

Thanks for the clear explanation.

Extending further what growinginside has already said.