Hi, I stumbled over a problem regarding the discounting of the “continuing residual income”. Let’s assume the firm’s residual income in period 4 is 0.45 and is expected to fade with omega 0.5 thereafter, i.e. from period 5 on. How come that you calculate the continuing residual income and discount it to period 3, i.e. you add the PV of the continuing residual income not to the residual income of period 4 but 3 according to the formula provided in the CFA curriculum. Isn’t the result that you simply ignore the RI of period 4 or is the persistence factor (omega) only “active” from period 5 on? I am just wondering because if you calculate the terminal value, which can be interpreted as the continuing residual income in the RI model, you would discount it to period 4 (in my example) and not 3. Thanks for your help!

You sir, are posting on the wrong level. Move along, nothing to see here…

I already did but it still does not answer my questions, sir!

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TO THE DEATH!