Very simple question but I’m getting confused…

I know that the equation for PVGO is:

Vo= (E1/r) + PVGO

However, a question in Reading 33 solved it by Eo and not E1

any clarifications…??

thanks a lot…

Maybe because earnings are not expected to grow? Would need to see the exact question.

Reading 33, Question 8, Page 278

Appreciate your help… :slight_smile:

It looks like a simple case. You are provided the Eo but not E1, so don’t calculate E1 using a growth rate, just assume the earnings will not grow. I know the formula is using E1 because you are forecasting a value so must use a forecasted value. However, in this question it is assumed that the best forecast is in fact the 2008 EPS, use that then. If E1 is provided, use E1; if not, use E0 with no growth and get the PVGO as always. Don’t bother too much on this wink

Unfortunately, the curriculum grows E0 by (1 + g) to get E1, then uses E1 in the perpetuity.

It’s stupid, but that’s the way they do it. So that’s the way that y’all’d better do it.


I never use formula in PVGO as its based on concepts

PVGO = Value with growth - Value without growth

A company can grow only when they reinvest a certain portion of the earnings ( and also their ROE should be greater than r to have positive growth else it will have bad growth)

In question 8, the company has already paid dividend and you are asked to calculate the value.

Value is always based on future cash flows

So your Dividend in 2008 = 0.4*2 = 0.8 but this has already been paid and it wont be counted when you value the stock

So you will take the dividend in 2009. The dividend in 2009 = 0.8 *(1+g)

g = 0.6*14 = 8.4%

Value with growth = 0.8 *(1+0.084)/(0.11-0.084) = 33.35

Now we will calculate Value without growth. A company will not grow if it does not reinvest anything, i.e it pays out all earnings as dividends

if thats the case , your dividend in 2009 = 2 , hence value of the stock = 2/0.11 = 18.18

PVGO = Value with growth - Value withiut growth = 33.35-18.18 = 15.16

Dont focus just on formula, it might be confusing

Great… Thank u all so much…