# Schweser version of residu income wrong!

Can someone confirm this? Look at how they calculate continuing RI on page 308. The continuing RI I thought was like a terminal value calculated at the end of the high growth stage, which is 5 in the example. However, The example and steps show that you need to calculate TV in the year before the final high growth period(4 in this example). Why? In a traditional DDM, the TV is calculated in the same year of the final high growth period. What gives?

it says in the problem that continuing RI at the end of year 5 is 0.

Not sure if that changes anything cp. Refer to the other parts in the example where its not zero. It still calculates continuing income a year before I expected(in year 4)

i have not seen anything wrong with the examples that have been listed in schweser in that chapter… i had done them a long time ago… Bannis has also looked at them, and no one else has raised concerns thus far… so not sure where you are headed. year 5’s RI=0.44 it is brought back to year 4 – as in all other DDM or any other type of problem.

Cp, Please refer to schweser page 314 #3 versus cfai page 573 #18. You’ll see that schweser calculates TV one year too soon(year 4) vs. Cfai who does it at the usual final year. Thx

please point it out as a erratum to Schweser, and then lets get the clarification from there.

iregula I am right there with you, I just reviewed that and was thinking the same thing…it doesn’t make any sense at all for them to do it that way. I will email them as well.

i don’t think it’s wrong, i think they just simplified it. after year 5 RI goes to zero. so let’s fast forward a year if you want to do the math- your terminal value would be 0 since RI is zero. so then you’d have that big equation the same but the only change would be .44/1.1^5… but that’s the same as the .4/1.1^4 they have there. so if they said RI after 5 yrs goes to some constant rate (NOT ZERO), i’d agree that it’s messed up. but here i think and correct me if i’m wrong, that they’re stuff is ok… they just tried to save a little time/space doing it the way they did. do it out the way you want to do it- tell me what you get as your answer. i’m thinking it’s going to be exactly the same number (i didn’t calc it out, lazy, but it feels to me like it’d be the same).

banni, I was talking about page 309 part 3. The question says that AFTER year 5 residual income decays to zero with a persistence factor of 0.4. so in my opinion Vo should be: Vo = 5.00 + (0.25/1.10) + (0.29/1.10^2) + (0.33/1.10^3) + (0.38/1.10^4) + ((0.44+0.63)/(1.1^5) conceptually it doesn’t make sense to use year 5 RI to determine terminal value, yet not use the residual income OF year 5 in the calculation of Vo.

confusing indeed. have you heard back from schweser?

no not yet, I emailed last night at like 11ish. did you email? have you heard anything?