Excess Earnings Method solution, question, 659, multiple, 690

sabaruch

In the CFAI book example (page 659 of Equity) they apply the residual income growth rate to get the value of intangibles. However, in the EOC question 15, the solution (page 690), they don't multiple the return on intagibles by the growth rate. Why is this?

kickthatcfa

What I know about EEM is the following:

It's always preferable to use the EEM method whenever there are intangibles included.

You get the value of intangible assets by Subtracting normalized FCFE from return on FA and Return on WC.

Value of Int Asset = Normalized FCFE - return FA - return WC

= Intangible Resid Y then you multiply it by (1+g) / r - g

The case where you dont multiply by 1+g is the Capitalized Cash Flow method where you divide FCFE by r-g cause there's only 1 growth period.

Correct me if im wrong, i hope this helps

neil1234

I thought so too, and thats what they do in the examples, but in the EOC, the solution does not multiply the Value of the Intangible Asset by 1+g. It just divdes r-g.