# reading 40 question 8(c)-pvgo

Do we use E or E1 to calculate pvgo? Looks like book uses E unless I’m reading things incorrectly.

without looking at the question - thought it was E/r, not E1?

E

eoc summary says E1/r is defined as the no growth value per share. In part (b) the calc D1 by taking D0 times the growth rate. Why would E1 not be calculated in the same fashion?

assumption is E1=E0 -> NO Growth… remember…

thx cp

cpk123 Wrote: ------------------------------------------------------- > assumption is E1=E0 -> NO Growth… remember… I disagree and think either that the EOC answer is mistaken, and E1 should have been taken, or the question is improperly worded. As the question is worded, 2008 is after the fact, and the earnings retention is 60%, not a no-growth 100%. Therefore equity, and earnings will grow by the sustainable growth rate of 8.4%. E1 is then \$2.168, and that is what should be used to derive PVGO. My answer is \$13.64 for PVGO. I might as well send this argument to CFAI (curriculum at cfainstitute dot org). This question already had one errata fix, and it sure seems to me it needs another.

pryan Wrote: ------------------------------------------------------- > cpk123 Wrote: > -------------------------------------------------- > ----- > > assumption is E1=E0 -> NO Growth… remember… > > I disagree and think either that the EOC answer is > mistaken, and E1 should have been taken, or the > question is improperly worded. As the question is > worded, 2008 is after the fact, and the earnings > retention is 60%, not a no-growth 100%. Therefore > equity, and earnings will grow by the sustainable > growth rate of 8.4%. E1 is then \$2.168, and that > is what should be used to derive PVGO. My answer > is \$13.64 for PVGO. > > I might as well send this argument to CFAI > (curriculum at cfainstitute dot org). This > question already had one errata fix, and it sure > seems to me it needs another. There was alot of disagreement since a similar question showed up in the 2009 exam. Let us know what they say.

bpdulog Wrote: ------------------------------------------------------- > > There was alot of disagreement since a similar > question showed up in the 2009 exam. Let us know > what they say. Thanks, I looked up the history and was surprised that this confusion has been reigning so long. Clearly if the answer is not the grown E1 (\$2 * 0.084), CFAI needs to improve its wording of these problems in order to make it clear their PVGO hypothetical of equity NOT increasing next year, in which case 100% of earnings are paid out in dividends, and so E1 does indeed equal E0. Absent that the wording seems patently misleading. Another way of looking at this, if I were a prospective investor, I would not be hypothesizing about changing the past. No, I would take E1 as anticipated and be interested in decomposing to PVGO and no-growth value on that basis. If I get feedback, I’ll post it. Hopefully they’ll look at it with fresh eyes.

Thank you for your query. Regarding practice problem 8C, the text is correct as written. When there is no growth, E0 = E1 = E2, etc., so the solution is correct. Please note that on page 325, E1 is defined as the constant level of earnings or the average earnings of a no-growth company. I hope this helps. Regards, Wanda Lauziere CFA Institute

Peter Olinto does a question like this in the Stalla videos. He emphasizes that you’re to use E0 unless you’re specifically told per the facts that growth exists, in which case you use E1. In the Stalla question from the video it explicitly stated that growth existed, so we had to use E1. I too agree that it’s really confusing and very poorly worded in CFAI texts.