ROE and EPS income, equity, solution, 2009

soverby

REF Q67-72 Lorenz Kummert

The Q asks to find residual income.
Formula: (ROE - r)B{t-1}
Given:
Cost of equity = 12.8%
Expected ROE for 2009 is 13%
Book0 (2008) = $32.16
Consensus 2009 EPS: $6.15

The solution applied $6.15, but I am wondering why ROE wasnt used. And if its used, shouldnt be the (13%-12.8%)X32.16
Solution in book : 6.15 - (32.16*12.8%) =
Thanks!

defour44

there must have been something else in the question that indicated that you should use the consensus eps rather than the expected RoE, because both are correct approaches. If you translate that consensus EPS into an RoE, you get 19.12%; which is quite a bit higher than the expected EPS of 13% you are giving us here.

not sure what else to tell you on that, i don't have that question in front of me.

(19.12% - 12.8%)*32.16 = $2.03 =6.15 - (32.16*12.8%)