Seeing is believing!

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.

Basic Question 4 of 4

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.

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 am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach

Andrea Schildbach

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.