Page 33 - FINAL CFA II SLIDES JUNE 2019 DAY 8
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LOS 32.h: Explain continuing residual income (CRI) and READING 32: RESIDUAL INCOME VALUATION
justify an estimate of continuing residual income at the
forecast horizon, given company and industry prospects.
MODULE 32.4: CONTINUING RESIDUAL INCOME
#2: RI drops immediately to Zero (ω = 0)
#1: RI persists at the current level forever (ω = 1)
EXAMPLE: Now let’s do a more realistic assumption 3: after
Year 5, RI will decay over time to 0 with ω = 0.4. New value?
#3: RI declines over time to zero (0<ω<1)
Terminal value in Year 4 includes the PV of Year 5 RI.
As we said, the more conservative the persistent factor, ω, the lower the intrinsic because the firm’s competitive advantage
and economic profits eventually disappear.
