Do we use current or next year earnings to calc pvgo?
PVGO = P0 - E1/r E1 being next year’s
PVGO assumes no growth earnings. E0 and E1 will be the same
wrong. Just take a look at the mock…if the firm retains some in the upcoming year, they will have growth and you need to find E1 as E0*(1+g) since there is growth in this coming period…afterwards, you find PVGO where it’s assumed no growth so thereafter Earnins do not grow. long story short, use E1, NOT E0 you can use E0 only if the firm paid everything out in dividends then in this case E0=E1 so it doesn’t matter
by this I mean i agree with the Moose all the way
PVGO definitely does not assume no growth earnings. the whole point of it is growth in earnings
if you are paying all earnings in dividends, you are not ‘growing’ and therefore can determine how much you could theoretically increase your share value by retaining some earnings for future growth…as long as ROE>r then retaining earnings should increase share value due to a positive PVGO disagree with me all you want… your choice
PVGO splits value of firm into two components, the growth opportunites and the value of its assets in place. E/r is the assets in place and E is the no growth earings level(E/r = PV of a perpetual cash flow).
From what I understand, if it says what is the PVGO on Dec. 31, 2010, then you can use E0 because you have not retained your earnings yet. You are at the point where you make that decision. However, if you are on January 1, 2011, you have to use E1 because the earnings from 2010 have already been reinvested. In most cases, you will use E1 (check the top of page 190 in the CFAI equity text).
This concept is minimally important anyway. I’ll put 50$ on “calculate the PVGO for this firm” to not be a question.
P = E1/r + PVGO
Curriculum, Reading 30, Practice problem 8-C Calculation of PVGO Formula says E1/r + PVGO & we calculated ‘g’ in A. as 8.4% Shouldn’t we put E1= 2(1+0.084)= 2.16 instead of $2 Why it is not calculated for the next period? If E1=E0, Why they don’t keep the formula E0 for the sake of avoiding the confusion??
Last June I e-mailed CFA Institute about this inconsistency.
They said that they’re working on it.
Thanks S2000magician, Appreciate your prompt reply. I have been following you since Level 1 here in AF. Keep up the good work mate.
If you look at updated Errata for Level 2, CFA Institute has updated the explanation for Practice Problem Number 8© in Reading 30. The answer explanation now makes more sense. However, the formula in the Reading 30 has still not been updated.