Question #13
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 7
Status: Correct
Correct Answer: A
Question
The present value of Forman Electronics' projected residual income (RI) for the next five years is GBP80 per share. Beyond that time horizon a key analyst projects that the firm will sustain a RI of GBP17 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?
Answer Choices:
A. £500.00
B. £19.96
C. £130.77
Explanation
The stock's terminal value as of year 5 is:
TV = 17.00 / 0.13 = 130.77