Reading 45: Residual Income Valuation-LOS m 习题精选 statements, 2011, generate, class, whether

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Session 12: Equity Investments: Valuation Models
Reading 45: Residual Income Valuation

LOS m: Evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a residual income model.

 

 

An analyst uses the financial statements of Advanced Instruments to generate the following estimates:

• Book Value per share = 4.00
• Dividend retention ratio = 75%
• ROE = 17%

If the required rate of return is 15%, and the current share price is $7.56 per share, the stock (using a single-stage residual income model) is most likely:

A) undervalued.

B) overvalued.

C) correctly valued.

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g = retention ratio × ROE = (0.75) × 0.17 = 0.1275 or 12.75%

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Midland Semiconductor has a book value of $10.50 per share. The company’s return on equity is 20%, and its required return on equity is 17%. The dividend payout ratio is 30%. The current share price is $21.00 per share. The shares (relative to a single-stage residual income model) are most likely:

A) correctly valued.

B) undervalued.

C) overvalued.

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g = retention ratio × ROE = (0.7) × 0.20 = 0.14 or 14%

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Big Sky Ranches reported the following for the end of its fiscal year:

• Book Value = $3.18
• ROE=22%
• Retention Ratio = 50%
• Required Return = 14.1%

The current share price is $11.28 per share. The shares (relative to a single-stage residual income model) are most likely:

A) correctly valued.

B) undervalued.

C) overvalued.

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g = retention ratio × ROE = (0.50) × 0.22 = 0.11 or 11.00%