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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