PVGO - Question 8c) in EOC therefore, anything, question

smuggycfa

In Reading 33 DDM it states that to calculate PVGO use this formula
Vo = E1/r + PVGO
So i took E1 as Earnings at time 1
In question 8 of the EOC’s (page 174) we have calculated in a) that the sustainable growth rate is 8.4% therefore there is growth in this company. My question is then why are we in c) assuming that this is a ‘non growth company (according to the answers). The question doesn’t say anything about it being a non growth company.
When i answered this I grew the earnings by the growth rate i.e
$2 (1.084)/0.11
When do you know to assume that the company is a growth or non growth company?

spartanag07

its just breaking up the intrinsic value into 2 parts. part 1= E1/r (this is the value of the company if earnings stayed constant i.e. 0 growth).  part 2= the present value of growth ops. so the question asks you to find out the PVGO.  You can solve for PVGO by assuming zero growth and solving for E1/r.  Once you get E1/r, then you can solve for PVGO using  Vo=E1/r + PVGO

stalkey

The answers uses E0…

thommo77

trogulj wrote:
Where in the question does it say to assume no growth. The first question a) suggests there is a retention ratio of 0.6?
Like has been said, the question is just separating things.  The first portion is the value of the firm IF it didn’t grow at all, so we can use E0.  Any and all of the growth should be captured in the PVGO, since that’s literally what PVGO is - the value added of growth.  So basically you’re just calculating the baseline value of the firm, and then finding what kind of value the growth is adding.
…I think