Why should I choose AnalystNotes?

Simply put: AnalystNotes offers the best value and the best product available to help you pass your exams.

Find out more

Basic Question 0 of 14

A company has a book value of $5 per share. It is expected to earn $0.60 per share in perpetuity, pays out all of its earnings as dividends, and has a required rate of return on equity of 10%. Calculate the value of the stock using the dividend discount model and the residual income model.
Check Answer Next Q Print

User Contributed Comments 2

User Comment
tengo use the single stage model with g=0% and roe=12% and bv =5
Rotigga Or alternatively:
ROE = NI / Equity BV = 0.6 / $5 = 0.12
V0 = B0 + (ROE - r) * B0 / r = 5 + (0.12 - 0.1)*5 / 0.1 = $6
You need to log in first to add your comment.
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

Tamara Schultz

Learning Outcome Statements

describe the uses of residual income models;

calculate the intrinsic value of a common stock using the residual income model and compare value recognition in residual income and other present value models;

CFA® 2025 Level II Curriculum, Volume 4, Module 24.