Question #44
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 23
Status: Unattempted
Question
Travel Advisors has earnings before interest and taxes (EBIT) of $200 million, interest expense of $83 million, taxes of $46.8 million, and total debt of $125 million. It is also financed with total equity of $650 million, which has a required rate of return of 12 percent. What is Travel Advisors' residual income? A:
Answer Choices:
A. loss of $70.2 million
B. profit of $70.2 million
C. loss of $7.8 million
Explanation
Net income = 200,000,000 – 83,000,000 – 46,800,000 = $70,200,000. The equity capital
charge is 650,000,000 × 0.12 = $78,000,000. Thus, residual income = 70,200,000 –
78,000,000 = – $7,800,000.
(Module 23.1, LOS 23.a)
V0 = $4.00 + (
× $4.00) = $7.56
0.17 - 0.15
0.15 - 0.1275