LOS c, (Part 1): Calculate future values of residual income given current book value, earnings growth estimates, and an assumed payout ratio.

Q1. Expert Systems (ES) has a beginning book value per share of $6.00, an expected growth rate of 15 percent, current earnings per share of $1.50, and a required rate of return of 17 percent. Assuming that the dividend remains constant at $0.75 per share, what is next year’s expected residual income per share?

A)   $0.50.

B)   $0.58.

C)   $1.73.

Q2. Craig Griffith, CFA, is valuing Specialty Steels, Inc. The following information is available:

What is Specialty Steel’s weighted average cost of capital (WACC)?

A)   11.07%.

B)   12.60%.

C)   10.30%.

Q3. If the total capital per share is same as the book value, what is Specialty Steel’s economic value added (EVA) per share for FY 2002?

A)   $1.264.

B)   $3.736.

C)   $0.646.

Q4. What is Specialty Steel’s forecasted residual income (RI) for FY 2002 and 2003?

       2002                                        2003

A)  $0.49                                       $0.51

B)  $0.51                                      $0.49

C)  $0.98                                      $1.10

Q5. Using FY 2002 data, what is the market’s expectation of the growth in residual income?

A)   8.2%.

B)   16.7%.

C)   4.4%.

Q6. Diamond Corp. (DC) has a beginning book value per share of $5.00, an expected growth rate of 15 percent, current earnings per share of $1.20, and a required rate of return of 17 percent. Assuming that the dividend remains constant at $0.55 per share, what is next year’s expected residual income per share?

A)   $1.38.

B)   $0.50.

C)   $0.42.

Q7. Expert Systems has a beginning book value per share of $7.00, an expected growth rate of 15%, this year's forecasted earnings per share of $1.25, and a required rate of return of 17. Assuming that the dividend remains constant at $0.75 per share, what is next year’s expected residual income per share?

A)   $0.16.

B)   $0.13.

C)   $1.44.

thanks