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Basic Question 4 of 5
An analyst observes that the current book value per share for ABC Corp is $7.58, and its dividend payout is 100%. The return on equity for the firm is expected to remain constant. If current earnings were reported at $0.95, and the required rate of return on equity is 11%, which of the following would best estimate the present value of residual in come on a per share basis?
B. $1.82
C. $8.63.
A. $1.06
B. $1.82
C. $8.63.
User Contributed Comments 6
| User | Comment |
|---|---|
| shipping | this seems very hard... |
| LloydBraun7 | Other way: Come up with the value of the stock: (next dividend)/(req. return)......since g = 0. 0.95/0.11 = 8.64. This is the price per share. Substract the book value per share (7.58). You're left with residual value per share (1.06). |
| aravinda | Any idea why the net book value (which is total asset = total debt + total equity) is used in the formula... I was under the impression that the netbook vlaue is the total asset not only equity... |
| Leese | Thanks LloydBraun7, that's easier. |
| Allen88 | aravinda, I think the book value is the equity value. Which is why the required rate of return on equity is charged against this value. Hope this helps. |
| davidt876 | "book value per share" is understood to mean book value of equity. in the same way the market value of a company is understood to mean the market value of equity |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
Learning Outcome Statements
calculate and interpret residual income, economic value added, and market value added;
CFA® 2025 Level II Curriculum, Volume 4, Module 24.