I have a question on the Live/In Person mock about residual income (Q32).
To calculate share price under the first assumption that ROE and payout ratio remain constant over time, they use equation (1) rather than equation (2) - see below.
(1) B + [(ROE-r)*B / r-g]
(2) B + [(ROE-r)*B / 1+r+w], where w = persistence factor.
I thought that a constant ROE, leads to constant residual income into the future with w=1.
In what situations do you use equation (1) vs equation (2) when solving for residual income? Thanks in advance!