Normalized P/E (ROE method) -- EOC Problem 1 including, something, reading, forward, method

tikfed

Reading 42 – p. 558
For (1c), CFAI’s answer uses the estimated 2007 BVPS in calculating the forward normalized P/E, NOT the last historical 2006 BVPS. In the reading itself, pp 475-6, including Example 4, they use the last historical BVPS, and this makes sense given the formula
EPS(t) = Avg(ROE) * BVPS(t-1)
What gives? Am I missing something? Or is the CFAI answer wrong?
Thanks!

smuggycfa

check you equation, it’s current BVPS

burnsy562000

Well, I developed the formula from a combination of pp 475-6 and somewhere else earlier in either the Equity or Corp Finance examples/problems where this formula was implied in order to derive a multiple-derived terminal value for a multi-stage CF valuation (ROE and end-pre-terminal stage BV was given, from which the P/E could be computed). Unfortunately I can’t seem to locate this souce at the moment.
So, I accept from you that my formula must be incorrect since CFAI itself is contradicting it. At first glance, it seems odd that a forcasted normalized valuation would be applied against a forecasted peak-cyclical future BVPS which is of course is derived from the forecasted peak-cyclical EPS. I have come to rationalize/comprehend this from the perspective of asking, “so what should the stock price be by then” (EOY 2007)? That’s where the normalized P/E comes into play, to calculate that expected PPS.
Thanks.