Reading 45: Residual Income Valuation- LOS h(part2)～ Q1-3 present, company, industry, income, Beyond

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LOS h, (Part 2): Justify an estimate of continuing residual income at the forecast horizon given company and industry prospects.

Q1. The present value of Forman Electronics’ projected residual income (RI) for the next five years is ￡80 per share. Beyond that time horizon a key analyst projects that the firm will sustain a RI of ￡17 per share, which is the RI for year 5. Given a cost of equity of 13%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡130.77.

C)   ￡19.96.

 

Q2. The present value of GB Industries’ projected residual income (RI) for the next five years is 70 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of 15 per share, which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡560.00.

C)   ￡125.00.

 

Q3. The present value of Raver Industries’ projected residual income (RI) for the next five years is ￡60 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of ￡11 per share, which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡560.00.

C)   ￡91.67.

wzaina

 

 

LOS h, (Part 2): Justify an estimate of continuing residual income at the forecast horizon given company and industry prospects. fficeffice" />

Q1. The present value of Forman Electronics’ projected residual income (RI) for the next five years is ￡80 per share. Beyond that time horizon a key analyst projects that the firm will sustain a RI of ￡17 per share, which is the RI for year 5. Given a cost of equity of 13%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡130.77.

C)   ￡19.96.

Correct answer is B)

The stock’s terminal value as of year 5 is:

TV = 17.00 / 0.13 = 130.77

 

Q2. The present value of GB Industries’ projected residual income (RI) for the next five years is 70 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of 15 per share, which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡560.00.

C)   ￡125.00.

Correct answer is C)

The stock’s terminal value as of year 5 is:

TV = 15.00/0.12 = 125.00

 

Q3. The present value of Raver Industries’ projected residual income (RI) for the next five years is ￡60 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of ￡11 per share, which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year 5?

A)   ￡500.00.

B)   ￡560.00.

C)   ￡91.67.

Correct answer is C)

The stock’s terminal value as of year 5 is:

TV = 11.00 / 0.12 = 91.67

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