In your equation if g = 0, then it reduces to E0/r ha ha ha, LOL, ROTFLMAO
but if there is no growth wouldn’t you have E0*(1+0)=E0 as the numerator?
P = (E0 * (1+g))/(r-g) or E1/(r-g)? What is your model’s name?
assuming growth is 0 as we did in the denominator.
deriv108 I am aware that the equation is not exactly the gordon growth model. you would need to add payout ratio however i am talking about the mechanics of valueing prepetual growth which is what the value of PVGO stands for. if g=0 then P=E1/r or P=E0/r (since E0=E1 with no growth) however this does not make the equation P=E0/g-r just because a special case exists wehere E0=E1 when g=0 btw, the equation P=E1/r + PVGO is in the textbook ( don’t have the books infront of me I will edit this post to refrence the page)
page 306 of equity book, i have it memorized now
I knew it’s a typo.
PVGO=P-E1/r is what the question was asking for, but E1=E0(1+g) has the growth g in it, and E1 is the estimate of the future earnings, which could be quite difficult to predict in a market like today’s. Using E1 looks more practical since E1 is usually reflected in the stock prices. On the other hand, PVGO=P-E0/r may also mean something since it’s all based on what has happened.
I’m thinking back to this problem and something came to mind about this whole debate. To preface, I’m of the camp that E0 should be used since any growth should be captured in the PVGO part of the equation; however, biases aside, wasn’t the E1 estimate they gave purely that one dude’s own estimate of earnings? If that’s the case, isn’t the argument even more difficult to make that E1 should be used for this problem, since it’s all but unlikely that the market’s consensus of PVGO (i.e., based on the current market price) is at all related to one guy’s own forecast? Just a thought.
Isn’t E0 prior period earnings and E1 current period earnings (estimated by g factor growth prior period earnings) making E1/r the appropriate term to isolate PVGO from the stock price?