Eoc. Q 33.
“Starting in year 4, Castovan forecasts TTCI’s ROE to revert to the constant long term ROE of 12% annually. The terminal value is based on an assumption that residual income per share will be constant from year 3 into perpetuity”
Why have they given two different forecasts for the final stage? How is one supposed to know which one to consider and which one to ignore? What am I missing here?
Well for me I calculated RI for the next three years and for the TV i got it as perpetutity ( RI3/re) then discounted it all back and added up the BV0 i got the correct answer, agree the ROE in year 4 might be confusing but why would i bother with ROE after year 3 when i got the terminal value and the 3 years RI ?
Cause mature stage long term growth is also an equally legitimate way to calculate terminal value?