Question #58
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 29
Status: Unattempted
Question
An analyst is considering the purchase of Delphos Machinery, which has a price-to-book value (P/
Answer Choices:
A. 8.43%
B. 10.57%
C. 11.00%
Explanation
The P/B ratio of 8.00 and the current book value per share of $12.00 imply a current
market price of $96.00. This implies a growth rate of:
g = r − [B0(ROE − r)] / (V0 − B0) = 0.11 − [12.00(0.14 − 0.11)] / (96.00 − 12.00) =
0.1057 = 10.57%.
(Note: the curriculum does not provide this expression directly.)