Equity: PVGO should

Andreas42

when calculate PVGO, use E/r, should we use E1 or E0? Thanks.

tikfed

exactly.

if the firm currently had no growth (100% payout ratio,) THEN Eo = E1 but that's not the case here so E1 is used.

tarunajwani

Definitely E1 brah; PVGO = P0 - E1/r

redskins44

wrong. there is growth in the coming year since the firm retained some NI..(retention ratio of 0.86), which is why you need to find E1 as 2.45(1.15284)= 2.84
then it's asking what percent of the forecasted share price is attributable to PVGO (i.e., without any growth going forward compared to growth)...similar to wondering whether the firm should pay dividends or not, which is all about whether ROE is greater than cost of equity (not necessary for this question though)

maryli

LL I agree. Only thing that your logic points out is it is no growth value, so technically E0=E1. So both are right. I wouldn't waste last week focusing on this or writing post about it, oh shtt. Back to swaps.

kickthatcfa

I'm disagreeing with using earnings one period ahead. You are looking to separate no growth value from the value of the company's growth opportunities.

Therefore, value of no growth plus value of growth opps equals present value of the firm. Or:

e sub 0/ req rate plus pvgo

Kapie

Ya there is a discrepancy there. They tell you the equation you guys are referencing where they say it must be E1, however, they then say you can use this to equate P/E, which is E0, and when you divide through by E0, the E's cancel leaving you with 1/R. So I don't think they will get you with that and if they do we can email them with our counter argument.

kkn006

Ahh, LincolnLogs you are right. I incorrectly added E1/Rce, it should be subtracted.
So...
PVGO = P0 - E1/Rce
OR,
P0 = PVGO + E1/Rce
Which then means,
P0 = E1/Rce (if PVGO = 0)

Need to take a break...

stalkey

disagree.

the value of a firm = e/r plus pvgo

e/r is the value of a no growth firm.

busterbluth

E1...
I had to check my formula sheet to be sure, but think of it this way. You are looking for growth. Trailing E, or E0, does not show growth - E1 does.
P0 + E1/Rce