Reading 49: Residual Income Valuation - LOS e ～ Q1 increase, 2008, return, required, class

cfaedu

1.Assuming that the growth rate is less than the required rate of return (r), an increase in return on equity (ROE) will cause value in a residual income (RI) model to:

A)   decrease if ROE is greater than the required rate of return.

B)   remain the same regardless of the relationship between ROE and the required rate of return.

C)   there is insufficient information to derive the effects of increasing ROE on RI.

D)   increase if ROE is greater than the required rate of return.

maxsimax

thanks

cfaedu

答案和详解如下：

1.Assuming that the growth rate is less than the required rate of return (r), an increase in return on equity (ROE) will cause value in a residual income (RI) model to:

A)   decrease if ROE is greater than the required rate of return.

B)   remain the same regardless of the relationship between ROE and the required rate of return.

C)   there is insufficient information to derive the effects of increasing ROE on RI.

D)   increase if ROE is greater than the required rate of return.

The correct answer was D)

An increase (decrease) in ROE increases (decreases) value if the ROE exceeds the required rate of return. This is revealed by the RI valuation expression:

V₀ = B₀ + [(ROE – r)/(r – g)]B₀