Question #55

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 28

Status: Unattempted

Part of Context Group: Q55-57 First in Group
Shared Context
- Using the assumptions given for RI Inc., and using a single stage (constant growth) model the hypothetical company shares would be valued at: A) $12.61. B) $9.78. C) $10.86.
Question
Is Chair correct in his stated concerns?
Answer Choices:
A. Incorrect in both
B. Correct in Statement 1 only
C. Correct in Statement 2 only
Explanation
Residual income is dependent on book value, which is an accounting based figure. The residual income constant growth formula can, however, be used to calculate implied growth given a market to book value ratio.
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