Question #31

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 18

Status: Correct

Correct Answer: A

Part of Context Group: Q31-33 First in Group
Shared Context
- Use the information above and the residual income model to calculate the implied growth rate in Entrebus Inc. A) 13.33%. B) 7.67%. C) 9.67%.
Question
What is the best estimate of the EVA for Busicomb for 20x6?
Answer Choices:
A. $0
B. –$3.46m
C. –$5.84m
Explanation
EVA = NOPAT – (invested capital × WACC) NOPAT = EBIT(1 – T) EVA = 150 × (1 – 0.3) – [(707.5 + 576) × 0.0845] = –3.46 Note that EVA (Economic Value Added) is a pre-levered version of residual income. A negative result means that returns are not sufficient to meet the requirements of the providers of finance. Negative residual income means that the model will not yield meaningful results from a valuation perspective. This does not prevent the model being a useful tool for managerial appraisal.
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