Question #22
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 10
Status: Correct
Correct Answer: A
Question
The present value of GB Industries' projected residual income (RI) for the next five years is 70 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of 15 per share, which is the RI for year 5. Given a cost of equity of 12%, what is the terminal value of the stock as of year 5?
Answer Choices:
A. £560.00
B. £125.00
C. £500.00
Explanation
The stock's terminal value as of year 5 is:
TV = 15.00/0.12 = 125.00