Hi all,

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




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?


Use E0. Simplify your life.

I’ve seen a question where they asked for the no growth value of a stock and provided growth rates for the first 3 years.

My point here being we should be cognizant of what they mean by ‘no growth value’

Could you please point out in the text where they prompt us to use E1? I used E0 and got this question wrong.

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.

Page 245, reading 35, Discounted dividend valuation (DDV)

Also check out the EOC question no 8, part C of DDV. They did not use the growth rate there.

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

So, if growth rate is provided - use E1, if not - use E0.


use the earnings based on the period where no growth occurs going forward.

g = 5% for years 1-5

g = 0% for years 6 to infinity


EPS for no growth period = EPS (t=0) * (1.05^5) / r

I had same question:

Since g=0, E1 = E0



I had same question:

Since g=0, E1 = E0


This was on the first CFAI Mock: V0 = E1/r + PVGO = 70 = ($5.33 *1.15 )/ .124 + PVGO

If you use E0 - you get a wrong answer…

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)…

Maybe #8 is wrong ?

Guys, this came back to haunt me…:frowning:

CFA 2011 Morning session- Problem 58, E1 is not equal to E0 in this question…

Anyone can clarify on this please ?

In SHW exam3 AM/Book 2 Q34 they used E1

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.

Anyone ?

I’ve been using E1, which seems to be working just fine