PVGO and Perpetuity Exercise

Hello, Here is a question and the answer with the explanation.


There is something I dont get. I thought the formula for the PVGO was: V0 = (E1/r) + PVGO

E1/r is suppose to be no dividends paid. The way they get the value of the perpetuity E1/r does not look like E1/r but E0/r to me.

They do 5.04/0.15. 5.04 is the value in 2018; should not we do (5.04*1.05) / 0.15? Then for the value taking into account the dividends to find V0 they takes D1. Do you see the problem? Thanks for your help

anyone please?

no-growth means g=0 by definition, so in this case EPS is constant.

Hello, Sorry but I dont get what you are saying. Yes EPS is constant. But it should start from the next year.


The Presest Value of Growth Opportunities is how much all future growth is worth. The no growth value needs to be calculated like a perpetuity. If you take the next year’s growth ‘ESP(1+g)’ then you’re factoring in some of the growth. Find the total value using GGM [using 'EPS(1+g)] and minus the value of a no growth perpetuity.

The reason we use D(1+g) for the total value is because we’re taking all future dividends, starting at next year’s dividend [which is D(1+g)]. For a dividend with no growth however, next year’s dividend is D(1+0)].

Do you remember PV of perpetuity CF from L1 Quants? Thats the same! Again, you can calculate next yr EPS with no growth( put g=0 in the formula ) and it will be the same because there is no growth.

This perfectly makes sense until you do the first CFAI mock and they use E0*growth rate in the PVGO model…

Hi all, I get it but look at this Mock exam from the CFAI’s website. The one from this year. Here they use E1. It is question 2 in the Mendosa case. In the first one I posted they use E0. but in this one they use E1.

Using the PVGO and assuming that the company has no positive net present value (NPV) projects, the PVGO Model is:

$70 = $49.43 + PVGO

PVGO = $70 - $49.43 = $20.57

2014 CFA Level II “Discounted Dividend Valuation,” by Jerald Pinto, Elaine Henry, Thomas Robinson, and John Sto



I did this mock and did exactly the same.

Has anyone got any more insight into this?

What do you mean? You used E1? What about the first case I showed you where they use E0? I agree it should be E1. I dont get why they use E0 in the first example I posted. Thx

In the CFAI books they’re using E1, and they’re using E1 for their latest mock, I think we should go with E1. Maybe they’ve had a change of heart from last year.

if growth is 0 at E0, isn’t E1 =E0? Shouldn’t make a difference.

Use E1 as in the curriculum. 0 growth happens after year 1.