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Basic Question 1 of 4
In 2012 a firm achieved a net income of $50 million on total assets of $500 million. Half of its assets were financed with debt. Its cost of equity is 15%. Calculate residual income.
User Contributed Comments 1
| User | Comment |
|---|---|
| danlan2 | RI=EBIT(1-t)-WACC*Assets =EBIT(1-t)-(Kd*Wd*(1-t)+Ke*We)*Assets We know that Kd*Wd*Assets=interest and Ke*We*Assets=Bv*Ke, then RI=EBIT(1-t)-interest(1-t)-Bv*Ke =NI-Bv*Ke RI=NI-BV*Ke |
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Tamara Schultz
Learning Outcome Statements
explain fundamental determinants of residual income;
explain the relation between residual income valuation and the justified price-to-book ratio based on forecasted fundamentals;
calculate and interpret the intrinsic value of a common stock using single-stage (constant-growth) and multistage residual income models;
CFA® 2025 Level II Curriculum, Volume 4, Module 24.