Question #16
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 8
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/
Answer Choices:
A. 11.00%
B. 10.60%
C. 0.40%
Explanation
The P/B ratio of 6.00 and the current book value per share of $13.00 imply a current
market price of $78.00. This implies a growth rate of:
g = r – [{B0(ROE – r)} / {V0 – B0}] = 0.11 – [{13.00(0.13 – 0.11)} / {78.00 – 13.00}] =
0.1060 = 10.60%.
Note that the reading in the curriculum does not provide this expression directly.