Question #26
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 12
Status: Correct
Correct Answer: A
Question
The total cumulative present value of Raver Industries' projected residual income (RI) over the next five years is GBP60 per share. Beyond that time horizon, a key analyst projects that the firm will sustain a RI of GBP11 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. £91.67
C. £500.00
Explanation
The stock's terminal value as of year 5 is:
TV = 11.00 / 0.12 = 91.67