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Reading 45: Residual Income Valuation-LOS d 习题精选

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

LOS d: Discuss the fundamental determinants of residual income.

 

 

Laura’s Chocolates, Inc. processes nut-based toffee for world-wide distribution. A summary of the company’s financial statements follows:

Book Value

Replacement Cost

Cash

10,000

10,000

A/R

35,000

35,000

Inventory

40,000

40,000

PPE

125,000

155,000

Total Assets

$210,000

$240,000

   

         

A/P

40,000

Current LTD

15,000

LTD

120,000

Equity

35,000

Total Liabilities and Assets

$210,000

Footnotes:

  • The market value of LTD is $140,000.
  • The market value of Equity is $95,000.
  • PV of expected future Residual Income is $85,000.

What is Tobin's Q?

A)
0.83.
B)
0.98.
C)
0.57.


 

Tobin’s Q is (Market Value of Debt + Market Value of Equity) / Replacement cost of total assets.
Q = (140,000 + 95,000) / 240,000
Q = 0.98

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)
there is insufficient information to derive the effects of increasing ROE on RI.
B)
increase if ROE is greater than the required rate of return.
C)
decrease if ROE is greater than the required rate of return.


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

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Professor Cliff Webley made the following statements in his asset-valuation class:

Statement 1: “Over time, a company’s residual income growth tends to approach the industry average.”

Statement 2: “If actual return on equity equals required return on equity, the residual income model sets the company’s proper market value equal to its book value.”

Statement 3: “The single-stage residual income model should give you the same valuation as the Gordon Growth model.”

Which of Webley’s statements is least accurate?

A)
Statement 2.
B)
Statement 1.
C)
Statement 3.


Over time, a company’s residual income growth tends to approach zero. It is unlikely that an industry’s average growth rate is zero, so Statement 1 is questionable. The other two statements are accurate.

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The single-stage residual income model values a company at:

A)
book value times a factor determined by the discount rate.
B)
book value plus the terminal value discounted at the weighted average cost of capital.
C)
book value plus the present value of the firm’s expected economic profits.


The single-stage residual income model values a company at book value plus the present value of the firm’s economic profits, or the additional value generated by the firm’s ability to produce returns higher than the cost of equity.

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Tobin’s Q is best expressed as:

A)
(Market Value of Debt + Book Value of Equity) / Replacement cost of total assets.
B)
(Market Value of Debt + Market Value of Equity) / Replacement cost of total assets.
C)
(Market Value of Debt + Book Value of Equity) / Book value of total assets.


Tobin’s Q is (Market Value of Debt + Market Value of Equity) / Replacement cost of total assets.

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