Reading 45: Residual Income Valuation- LOS c(part1)～ Q1-7

expected, required, beginning, current

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:

Current market price per share	$18.00
Book value per share (FY 2002) BV₀	$12.00
Consensus EPS estimates:
FY 2002	$2.00
FY 2003	$2.15
Dividends per share
FY 2002	$1.00
FY 2003	$1.00
FY 2002 NOPAT per share	$2.50
Specialty Steel’s (equity) Beta	1.10
Expected market rate of return	12.0%
Specialty Steel’s after-tax cost of debt	8.0
Risk-free rate	6.0%
Specialty Steel’s Debt to Total Assets	50%

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.