CFA CFA Level 2 Is there a TV for a Multistage Residual Income Model?

Is there a TV for a Multistage Residual Income Model?

• Author
Posts
• vincentt
Participant
• CFA Level 3
1

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?

• 5

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.

• 3

@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?

• 3

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.

• vincentt
Participant
• CFA Level 3
2

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.

• vincentt
Participant
• CFA Level 3
1

@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 ?

• 1

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.

• Zee Tan
Keymaster
• CFA Charterholder
0

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.