Question #19
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 9
Status: Correct
Correct Answer: A
Question
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%. What is the value of the shares using a single-stage residual income model?
Answer Choices:
A. $31.50
B. $21.00
C. $10.50
Explanation
g = retention ratio × ROE = (1 − 0.30) × 0.20 = 0.14 or 14%