Question #62
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 30
Status: Unattempted
Question
Red Shoes's recent financial statements reported a book value of $11.00 per share; its required rate of return is 9%. Analyst Tony Giancola, CFA, wants to calculate the company's intrinsic value using a multistage residual income with a high-growth RI for the next 5 years. Giancola creates the following estimates: PV of interim high-growth RI for the next 5 years is $ 2.90 At the end of year 5, the PV of continuing RI is $7.00 Estimated Book Value in 5 years is $14.00 Which of the following is closest to the current intrinsic value of Red Shoes?
Answer Choices:
A. $9.90
B. $18.45
Explanation
Applying the multistage residual income model:
V0 = B0 + PV of interim high-growth RI + PV of continuing RI
= 11.00 + 2.90 + [(7.00) / (1.09)5] = $18.45