V5 Module 5 Errata: Introduction to Equity Valuation

1. Equation 10 Mixes Calendar Dates with Forecast-Period Indices

Curriculum location: Equity Valuation Models, Present Value Models, Equation 10, p. 127.

$${\mathrm{IV}}_t=\sum _{i=t+1}^n\frac{E\left({\mathrm{CF}}_i\right)}{{\left(1+\text{Required rate of return}\right)}^i}+\frac{E\left(P_{t+n}\right)}{{\left(1+\text{Required rate of return}\right)}^n},\text{\hspace{1em}(10)}$$

The equation labels value at date $t$ and terminal price at $t+n$, but it starts the sum at $i=t+1$, ends it at $n$, and discounts by $i$ periods. For any nonzero $t$, those bounds omit or mis-time forecast cash flows. The surrounding text describes $n$ future periods, so the summation index must count periods ahead while the cash-flow subscript retains the calendar date.

Correct reading: Use a single forecast-period index:

$${\mathrm{IV}}_t=\sum _{i=1}^n\frac{E\left({\mathrm{CF}}_{t+i}\right)}{{\left(1+\text{Required rate of return}\right)}^i}+\frac{E\left(P_{t+n}\right)}{{\left(1+\text{Required rate of return}\right)}^n}.$$

Using one consistent time index prevents candidates from omitting forecast cash flows or discounting them by the wrong number of periods.

2. Residual Income Is Incorrectly Ranked Below FCFE

Curriculum location: Equity Valuation Models, residual-income comparison, p. 129.

"As a measure of excess return, residual income is smaller than earnings, which measures all funds available for reinvestment or distribution via dividends or buybacks, and FCFE, which also includes net debt issuance."

Residual income equals net income less the equity capital charge. FCFE is instead a cash-flow measure driven by operating cash flow, capital expenditure, and net debt issuance. The module's own definitions allow either measure to be larger: for example, with beginning book equity of $100$, net income and operating cash flow of $15$, an equity charge of $10$, capital expenditure of $20$, and no net debt issuance, residual income is $5$ while FCFE is $-5$.

Correct reading: Residual income is below net income when the equity capital charge is positive. There is no general ordering between residual income and FCFE.

This correction prevents candidates from using a false magnitude ranking to compare or select valuation models.

3. Equation 13 Repeats First-Period Residual Income in Every Term

Curriculum location: Equity Valuation Models, Residual Income Approach, Equation 13, p. 129.

$${\mathrm{IV}}_t={\mathrm{BVE}}_t+\sum _{i=1}^n\frac{{\mathrm{RI}}_{t+1}}{{\left(1+r_e\right)}^i}+\frac{E(P{)}_{t+n}-(\mathrm{BVE}{)}_{t+n}}{{\left(1+r_e\right)}^n}.\text{\hspace{1em}(13)}$$

The numerator inside the sum remains ${\mathrm{RI}}_{t+1}$ even as $i$ advances. Exhibit 9 directly above Equation 13 instead shows the period-specific term ${\mathrm{RI}}_{t+i}$, which is required to discount each future period's own residual income.

Correct reading: Use period-specific residual income:

$${\mathrm{IV}}_t={\mathrm{BVE}}_t+\sum _{i=1}^n\frac{{\mathrm{RI}}_{t+i}}{{\left(1+r_e\right)}^i}+\frac{E(P{)}_{t+n}-(\mathrm{BVE}{)}_{t+n}}{{\left(1+r_e\right)}^n}.$$

The corrected subscript prevents candidates from valuing every forecast period with only the first period's residual income.

4. Residual-Income Applicability Uses a Meaning-Reversing Double Negative

Curriculum location: Equity Valuation Models, residual-income applicability, p. 129.

"or do not even have negative free cash flow over the forecast horizon."

The double negative says the model is especially appropriate when negative free cash flow is absent. The surrounding sentence retains the no-book-value-distortion condition, while Exhibit 10 on p. 130 states the opposite cash-flow condition: residual-income valuation is useful for firms with inconsistent dividends or negative cash flow.

Correct reading: Residual-income models are especially useful for firms with reliable, materially undistorted book values when dividends are inconsistent or free cash flow is negative over the forecast horizon.

This correction protects the model-selection rule candidates are expected to apply when cash-flow-based approaches are difficult to use.

5. ACL's P/E Formula Reverses Net Income and Shares Outstanding

Curriculum location: Equity Valuation Models, Logistics Industry Competitors and the Price-to-Earnings Ratio Case Study solution, p. 133.

$$\text{ACL: }P/E=9.5\left[=\mathrm{INR}95÷\left(\mathrm{INR}10\text{ million}÷100\text{ million}\right)\right]$$

The table gives ACL net income of INR100 million and 10 million shares outstanding. EPS is therefore $100\text{ million}/10\text{ million}=\mathrm{INR}10$, so the stated P/E of $95/10=9.5$ is correct. The printed inner division reverses those operands; following it literally gives EPS of $0.1$ and a P/E of $950$.

Correct reading: Use $P/E=\mathrm{INR}95÷\left(\mathrm{INR}100\text{ million}÷10\text{ million}\right)=9.5$. The printed answer and option assessment do not change.

Separating the wrong setup from the correct answer lets candidates reproduce the calculation and retain the correct EPS definition.

Complete Module 5 Errata Index

Scope: Module 5, pp. 105–144 (printed page numbers).

What this review covers. Errors in the printed curriculum that would change a candidate's answer or understanding: wrong numbers, wrong formulas, reversed logic, and statements that contradict the module's own data. It does not list spelling mistakes, equation-numbering slips, or wording that is loose but defensible.

The table below lists all high-value, objectively confirmed curriculum errors covered by this article. Import-only defects, question errors not printed in the module source, disputed or reasonably defensible claims, and low-value editorial corrections are outside scope.

References

• CFA Institute: Free Cash Flow Valuation
• CFA Institute: Market-Based Valuation—Price and Enterprise Value Multiples
• CFA Institute: Residual Income Valuation

This article is an independent candidate-focused analysis of confirmed errors in the CFA Level I 2027 Curriculum, Volume 5 Equity Investments, Module 5 Introduction to Equity Valuation. It is not an official CFA Institute errata notice, and inclusion here must not be read as CFA Institute confirmation, endorsement, or approval.