CFA curriculum defines pvgo as Vo-e1/r where e1 is the no-growth earnings level. However, I am confused about whether to use e0 or e1 in the formula. In one of the eoc question (no 8, part c, DDM valuation) explanation, they said there would NOT be any difference between e0 and e1 since earnings would not grow.

However I got a question wrong related to PVGO when I attempted the Mendosa reading (equity assesment 3, question no 2, CFAI website). The following data was given

Vo=70

r=12.4%

E0=5.33

Earnings growth rate=15%

They multiplied the current earnings of 5.33 by 1.15 to get E1. However, they explained in eoc answer that there would not be any difference between them

So, should we increase the e0 by (1+earnings growth rate) to get e1 or not?

I too got the same question wrong by using V0 = E0/R + PVGO for the PVGO formula. I’m quite confused as to which is right. The text says E0 (no-growth earnings) and sample questions are using E1.

the way i see it is that in part C they are making an assumption that there is 0 growth. if you assume that the growth rate is 8.4% from part A then we would have to multiply the EPS by the growth rate. hence the answer to C is kind of tricky because you solve for the growth rate in part A then they say in the solution to Part C to assume 0 growth rate, which then E0 would equal E1 anyway

It seems that we are still not clear…atleast not me…In the curriculum theory, they define E1 as constant level of earnings or the average earnings of a no growth company (page-244 & 245)…

This question is garbage. The one presented by CFAI, that is. I’m having a similar issue understanding this. You want to use earnings at a no-growth level. E0 seems most logical, however they used E1 (5.33)*(1.15). Why do you use E1- incorporating the 15% growth? Appreciate everyone’s time and good luck studying.