6.Regarding their statements about the forecast error in residual income models and when they recognize value, who is correct?

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A)                   Correct                                Correct

B)                   Correct                               Incorrect

C)                  Incorrect                              Correct

D)                  Incorrect                              Incorrect

7.Which of the following is least likely to characterize the difference between a residual income model and a free cash flow to equity model?

A)   A residual income model is applicable to a firm that does not have free cash flow.

B)   Terminal value represents a higher proportion of intrinsic value in a residual income model than in a dividend discount model.

C)   Residual income models rely on accounting data that is generally easy to find.

D)   Inputs to a residual income model are more easily manipulated by management.

8.The residual income of Geremiah Analytics is closest to:

A)   $120,000.

B)   –$120,000.

C)   $1,080,000.

D)   –$1,272,000.

9.Regarding their statements about ROE and residual income, who is correct?

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A)                   Correct                                 Correct

B)                  Correct                                 Incorrect

C)                 Incorrect                                 Correct

D)                 Incorrect                                Incorrect

10.Sue Clifton, CFA is a senior portfolio manager at Lewiston Investments, a small research firm. Clifton has been assigned to help new hire Ralph Rawls get acclimated to his new job as a stock analyst. She discovers early on that Rawls is not too familiar with residual income valuation, a tool for determining economic profitability.

Clifton explains the basics of the residual-income model and the clean surplus relationship that underpins the system. Clifton then offers Rawls some reasons why residual income is useful:

Clifton explains to Rawls that analysts use assumptions to make the residual-income models easier to interpret. She goes on to identify four commonly used assumptions: Residual income can be expected to:

§ disappear immediately.

§ decline gradually as ROE declines.

§ stay at the same level indefinitely.

§ decline to the market average.

After her initial review of residual income, Clifton gives Rawls a test. The answers depend on the use of the following information about CR Industries in Year X: (in $ millions)

When a company’s return on equity (ROE) is the same as the return required by the market, the stock’s justified market value is closest to the:

A)   book value.

B)   actual market value plus residual income.

C)   book value plus residual income.

D)   the terminal value of estimated cash flows, discounted at the estimated growth rate.

答案和详解如下：

6.Regarding their statements about the forecast error in residual income models and when they recognize value, who is correct?

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LaMarre

Hofstedt

A)                  Correct                                Correct

B)                  Correct                               Incorrect

C)                  Incorrect                              Correct

D)                 Incorrect                               Incorrect

The correct answer was B)

LaMarre is correct that residual income models are less subject to forecast error than free cash flow to equity models because a large portion of intrinsic value in a residual income model is current book value. Hofstedt is incorrect because residual income models tend to recognize value earlier, not later, than other present value based approaches.

7.Which of the following is least likely to characterize the difference between a residual income model and a free cash flow to equity model?

A)   A residual income model is applicable to a firm that does not have free cash flow.

B)   Terminal value represents a higher proportion of intrinsic value in a residual income model than in a dividend discount model.

C)   Residual income models rely on accounting data that is generally easy to find.

D)   Inputs to a residual income model are more easily manipulated by management.

The correct answer was B)

Terminal value represents a lower, not higher, proportion of intrinsic value in a residual income model than in other present value based approaches. A residual income model is applicable to a firm that does not have free cash flow and relies on accounting data that is generally easily found. However, the accounting data used in a residual income model are more easily manipulated by management than cash flow data.

8.The residual income of Geremiah Analytics is closest to:

A)   $120,000.

B)   –$120,000.

C)   $1,080,000.

D)   –$1,272,000.

The correct answer was B)

Geremiah’s after-tax income is ($3 x (1 – 0.40)) = $1.8 million. They have ($40 x 0.60) = $24 million in debt and ($40 x (1 – 0.60)) = $16 million in equity. Their equity charge is ($16 x 0.12) = $1.92 million. Their residual income is ($1.8 – $1.92) = –$0.12 million, or –$120,000.

9.Regarding their statements about ROE and residual income, who is correct?

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LaMarre

Hofstedt

A)                  Correct                                 Correct

B)                  Correct                                 Incorrect

C)                   Incorrect                             Correct

D)                 Incorrect                               Incorrect

The correct answer was C)

LaMarre is incorrect because the present value of the continuing residual income for a firm is equal to the current value divided by the return on equity when residual income continues indefinitely, which is not the case if ROE declines to the return on equity capital. Hofstedt is correct that ROE declining to the cost of equity capital implies a decline in residual income and thus a persistence factor between zero and one.

10.Sue Clifton, CFA is a senior portfolio manager at Lewiston Investments, a small research firm. Clifton has been assigned to help new hire Ralph Rawls get acclimated to his new job as a stock analyst. She discovers early on that Rawls is not too familiar with residual income valuation, a tool for determining economic profitability.

Clifton explains the basics of the residual-income model and the clean surplus relationship that underpins the system. Clifton then offers Rawls some reasons why residual income is useful:

Reason 1:	“Residual-income valuation works even when cash flows are volatile or negative.”
Reason 2:	“Terminal value, the most uncertain aspect of dividend discount models, is less important in residual-income valuation.”
Reason 3:	“The models depend on data that is easy to obtain and requires minimal modification.”
Reason 4:	“Residual-income models are dependent on assumptions about earnings growth.”

Clifton explains to Rawls that analysts use assumptions to make the residual-income models easier to interpret. She goes on to identify four commonly used assumptions: Residual income can be expected to:

§ disappear immediately.

§ decline gradually as ROE declines.

§ stay at the same level indefinitely.

§ decline to the market average.

After her initial review of residual income, Clifton gives Rawls a test. The answers depend on the use of the following information about CR Industries in Year X: (in $ millions)

Invested capital:	$225
Market capitalization:	$231
Tax rate:	40.0%
Interest expense:	$12
Depreciation and amortization expense:	$25
SG&A expense:	$10
Dividend expense:	$6
Debt:	$130
COGS:	$26
Sales:	$90
Pretax cost of equity:	11.4%
Pretax cost of debt:	5.0%

When a company’s return on equity (ROE) is the same as the return required by the market, the stock’s justified market value is closest to the:

A)   book value.

B)   actual market value plus residual income.

C)   book value plus residual income.

D)   the terminal value of estimated cash flows, discounted at the estimated growth rate.

The correct answer was A)

When ROE is equal to the required return on equity, the justified market value of a share of stock is equal to its book value. In this case, there is no residual income.