Just a quick one guys, for any DDM or FCF models, there is usually a terminal value at the end where the growth is expected to be stable forever. However, for RI's multistage there's no terminal value and the formula is just: V = Book Value(@ t-1) + (RI / (1+r) .....) Then I noticed there's this other thing with persistence factor which looks pretty much like a terminal value. When do we know when to include the terminal value thingy?

hi, 'm new here. Just trying to add something here. For residual income valuation models, we do not have TV as such. Because over a period of time, ROE equal r and RI comes to nil. To derive value of RI over a period of time till it comes to nil, we apply persistence factor based on rate at which RI decreases. TV is applicable only when value is going to grow for infinite period which is not the case here. Correct me, if 'm on wrong track.

TV is basically the PV sum of all residual income in the future (the time t where this period applies doesn't matter, the concept is future income PV-ed). So we are all prolly trying to same thing here @niravjoshi1988. I think its just terminology.

A CFA Level 2 Discussion About Is There A TV For A Multistage Residual Income Model?

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This topic has 7 replies, 4 voices, and was last updated Apr-178:05 pm by Sophie Macon.

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- vincentt
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  - CFA Level 3
  14 Apr 2017 at 10:21 am
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  Just a quick one guys, for any DDM or FCF models, there is usually a terminal value at the end where the growth is expected to be stable forever.
  
  However, for RI’s multistage there’s no terminal value and the formula is just:
  
  V = Book Value(@ t-1) + (RI / (1+r) …..)
  
  Then I noticed there’s this other thing with persistence factor which looks pretty much like a terminal value.
  
  When do we know when to include the terminal value thingy?
- Zee Tan
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  - CFA Charterholder
  14 Apr 2017 at 10:29 am
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  There is no straight-up rule – as far as I know the question should explicitly state that the company is either assumed to have stable growth or not.
- vincentt
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  14 Apr 2017 at 10:33 am
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  @zee but there seems to be 2 different RI multistage calculation. One without TV and one with TV (using the persistence factor).
  
  So you’re saying that if they specifically mention the persistence factor, then we’ll have to include the TV, otherwise i shouldn’t ?
- Sophie Macon
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  14 Apr 2017 at 11:31 am
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  @Vincentt – they all have TV. The formula you have above has TV element, as it’s continuous until time n. I haven’t seen one that doesn’t have it unless it’s explicitly mentioned no TV?
- vincentt
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  14 Apr 2017 at 11:44 am
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  Saw something like this without TV
  
  Also, i thought i read somewhere that says it’s equivalent of TV is actually the BV(t-1) that you start with before all the PVs of future RIs.
- Sophie Macon
  Keymaster
  14 Apr 2017 at 2:54 pm
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  The part of the equation excluding book value is a form of TV, that has a finite n, in this case 3. Your last sentence is right.
- niravjoshi1988
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  16 Apr 2017 at 7:48 pm
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  hi, ‘m new here. Just trying to add something here. For residual income valuation models, we do not have TV as such. Because over a period of time, ROE equal r and RI comes to nil. To derive value of RI over a period of time till it comes to nil, we apply persistence factor based on rate at which RI decreases. TV is applicable only when value is going to grow for infinite period which is not the case here.
  
  Correct me, if ‘m on wrong track.
- Sophie Macon
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  16 Apr 2017 at 8:05 pm
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  TV is basically the PV sum of all residual income in the future (the time t where this period applies doesn’t matter, the concept is future income PV-ed). So we are all prolly trying to same thing here @niravjoshi1988. I think its just terminology.
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