PVGO, E or E1/r

wrong.
Just take a look at the mock…if the firm retains some in the upcoming year, they will have growth and you need to find E1 as E0*(1+g) since there is growth in this coming period….afterwards, you find PVGO where it’s assumed no growth so thereafter Earnins do not grow.
long story short, use E1, NOT E0
you can use E0 only if the firm paid everything out in dividends then in this case E0=E1 so it doesn’t matter
 
by this I mean i agree with the Moose all the way
 
PVGO definitely does not assume no growth earnings. the whole point of it is growth in earnings
 
if you are paying all earnings in dividends, you are not ‘growing’ and therefore can determine how much you could theoretically increase your share value by retaining some earnings for future growth…as long as ROE>r then retaining earnings should increase share value due to a positive PVGO
disagree with me all you want…. your choice ;)
 
PVGO splits value of firm into two components, the growth opportunites and the value of its assets in place. E/r is the assets in place and E is the no growth earings level(E/r = PV of a perpetual cash flow).
 
From what I understand, if it says what is the PVGO on Dec. 31, 2010, then you can use E0 because you have not retained your earnings yet. You are at the point where you make that decision. However, if you are on January 1, 2011, you have to use E1 because the earnings from 2010 have already been reinvested.
In most cases, you will use E1 (check the top of page 190 in the CFAI equity text).
 
This concept is minimally important anyway. I’ll put 50$ on “calculate the PVGO for this firm” to not be a question.
 
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