CFA Practice Question

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CFA Practice Question

A company's current BVPS is $50. Consensus EPS estimates for the next two years are $6 and $8. After the second year residual income is expected to be equal to year 2's economic profits indefinitely. The required rate of return on equity is 10%. It is not expected to pay dividends. The company's intrinsic value per share is ______.
Correct Answer: Since the company is not paying dividends, B1 = B0 + E1 = $50 + $6 = $56; and B2 = B1 + E2 = $56 + $8 = $64.

Intrinsic Value = B0 + (E1 - r x B0) / (1 + r) + (E2 - r x B1) / (1 + r)2 + [(E2 - r x B1) / r] / (1 + r)2 = $50 + ($6 - 0.10 x $50) / (1 + 0.10) + ($8 - 0.1 x $56) / (1 + 0.1)2 + [($8 - 0.1 x $56) / 0.1] / (1 + 0.1)2 = $72.72.

User Contributed Comments 2

User Comment
ssradja Don't forget that BV goes up by EPS - D
quanttrader last term is PV of RI perpetuity
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