PVGO - E0 or E1? - FRA

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Mikolaj R

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I found different approaches in Schweser and CFA Mock exam concerning this issue.
Should we use E0 or E1 in computing value for assets in place?
Vo= E/r + PVGO
 
can someone please answer this..scwesser mock used e1 whereas cfa official mock used E0
 
Use the earnings which are going to persist into the future.
 
E1, cuz you value your company today based on what you’ll earn in future.
 
I think it is Eo, i believe what kaplan used was also Eo but they had to grow it by (1+g) becuase they provided us with last years earnings. …… i know i am guessing but i belive we use Eo
 
I think it’s E0 coz if you look at the solution to that question it’s
=PV with no growth (E0/r) + PV of growth opportunity = PV with perpetual growth
= 33.6 + (-12.43) = 21.17
Where the V0 is calculated using E1
 
search. there is already a thread on this. its whatever earnings persist in the future.
 
My $0.02 cents- it is E0.
Value of the equity = Value if there is no growth in earnings (E0/r) + PV all growth opportunities. If E1 is different from E0–> there is growth and therefore it should be captured by the 2nd term PVGO and not the first.
 
I always thought the same as KC. E1 is a growth opportunity…it’s grown since E0. So you take current (i.e. E0) earnings, divide that by the rate, and that is your base value. Everything else is growth, including the delta from E0 to E1.
Babbabooey any backup for what you say or you just wasting people’s time?
 
I was under the impression that you use E0 for the perpetuity. It represents the current earnings with no growth, which is what you are looking for. Any growth will be included in PVGO
 
And I quote, “E(1) is t=1 earnings, which is the constant level of earnings or the average earnings of a no-growth company if return on equity is viewed as varying about its average level. The no-growth value per share is defined as E(1)/r, which is the pv of a perpetuity in the amount of E(1) where the capitalization rate, r, is the required rate of return on the company’s equity.”
Don’t ever question my orders in front of another officer…
frgna wrote:
I always thought the same as KC. E1 is a growth opportunity…it’s grown since E0. So you take current (i.e. E0) earnings, divide that by the rate, and that is your base value. Everything else is growth, including the delta from E0 to E1.
Babbabooey any backup for what you say or you just wasting people’s time?
Click to expand...
 
CFAI’s Investment Series “Equity Asset Valuation” 2nd edition.
From what I can tell, it is essentially the CFAI level II equity text broken down into simpler/more readable terms.
 
I can get behind that bababooey. Much love bro :)
Let’s hope on the test (if it shows) that the answer choices are just so wildly disparate that it’s obvious.
Having one answer that is the “correct” use of E0 and one that is the correct use of E1, that would be a dick move from CFAI, since many seem to be confused on it.
 
To be super safe, I’m going to run both on the exam if it shows. And if they’re both choices, I’m going with E1, but I’m not going to be happy about it.
 
It might be one of those things they specify in the problem. hopefully…
 
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