when RI is expected to decline over time after year T as ROE falls to the cost of equity capital with a persistence factor w (between 0 and 1): PV of continuing residual income in year T-1=RIt/(1+r-w) here w, how “w” work? dose it mean ROE falls to w*Cost of equity factor? Thanks.
look at it this way: if the ROE doesnt fall, then W = 1, so you are going to gain a perpetual value example: RI = 5 r = .10 W = 1 (ROE never falls) 5/1+ .10 - 1 = $50 W= .5 (ROE slowly falls) 5 / 1 + .1 -.5 = $8.3 W=0 (ROE immediately goes to R) 5/ 1+.1 = $4.54 so, the lower the persistance factor, the less terminal value u have