Question #73
Reading: Reading 23 Residual Income Valuation
PDF File: Reading 23 Residual Income Valuation.pdf
Page: 35
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 $850 million, which has a required rate of return of 12%. What is Travel Advisors' residual income?
Answer Choices:
A. A loss of $31.8 million
B. A profit of $31.8 million
C. A profit of $70.2 million
Explanation
Net income = 200,000,000 – 83,000,000 – 46,800,000 = $70,200,000. The equity capital
charge is 850,000,000 × 0.12 = $102,000,000. Thus, residual income = 70,200,000 –
102,000,000 = – $31,800,000.