Not positive when ROE = Cost of Capital? RI Intrinsic value biased when divs are excluded?
continual growth for the second agree on the first
Why continual growth and not divs excluded? Wouldnt divs being excluded mean an upward bias in RI?
ri declines eventaully to industry avg, having continual growth is likely a biased assumption
RI = (ROE - r) * BV0 When ROE = cost of capital ®, RI = 0 But value of the firm = BV0 + RI/(r-g) [one stage model] so value will just be BV0 RI = E1 - r*BV01 BV01 is calculated using the clean surplus approach (which includes the dividend anyway) so RI intrinsic value does take care of dividends. If dividends are excluded, clean surplus wouldn’t be achieved and RI will be biased. Just my two cents.
Yeah i’ve seen that Q come up on practice tests. Sounds right dirty. Dirty - you really have the whole freakin PM section mapped out?
From CFA book, there are 4 scenarios for continuing RI, one of which is to continue indefinitely at the same rate
yeah but it also talks frequently about how that is likely a garbage assumption. unless the company in this case was in the sort of industry where that crap is likely, who knows…
Residual income is just that, residual. What’s left after all obligations. Dividends aren’t an obligation, so they are not included in the calculation.
If a firm neglects to deduct the payment of dividends, BV will be higher, which means RI will be higher.