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I came up with a better single-stage residual income model.

Has anyone seen this before? I'm basically multiplying the book value with the justified price-to-book ratio to come up with a stock value that takes into account single stage residual income.

Vo=BVo[(ROE-g)/(r-g)]

Seems easier than the CFA model:

Vo=BVo+[(ROE-r)BVo/(r-g)]
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Comments

  • I think the CFA curriculum probably uses theirs so that you can clearly see how the two parts (the beginning book value, and the RI) are separate. Otherwise maybe people would use the 1st formula and then add BVo while your formula does not require that addition. Also, (ROE-r)BV is the formula for RI, so it is easy to remember that way that the 2nd part of the equation is just RI/(r-g)

    Just be careful not to get all of those mixed up with the formula for justified BV = (ROE-g)/(r-g)... They all start to melt together when they are similar.
  • christinechristine On the movePosts: 632 Sr Portfolio Manager
    Yep there are many ways to represent a formula, but usually the one that's taught isn't necessarily the simplest form, but the one that demonstrates the underlying concept in the clearest manner.
  • true point christine... in level 2, i'm definitely seeing more "component concepts" in the formulas than i did in level 1, due to developing more intuition of what's behind the calculation. i guess that means i'm learning. lol
    christine
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