Residual Income TV

CFA Level II Equities
#1

So I know if we are given the data to calculate residual income for the next 5 years, and we know that residual income falls to 0 abruptly after yr 5, then we simply find the PV of all the RI cash flows and add those to BBV- easy enough.

But when given a persistence factor of say .5 starting in year 5, I know we would do RI5/1+RFR-pers factor to get the terminal value to stick on the timeline. Here is my question:

  • if the persistence factor is ‘reached at the end of year 5’, does that mean the RI for year 5 can be used to get a TV at t=4. Or does it need to say ‘if the persistence factor is reached starting in year 6’ to do that?
#2

I think of the persistence factor TV kind of like a constant growth/perpetuity formula in that you need to use the next period’s relevant cash flow (in this case, residual income @ t = 5, and its persistence factor that commences at t = 5 to find the TV as of t = 4). Hope this helps!

#3

thnx!