- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 24. Residual Income Valuation
- Subject 3. The Residual Income Valuation Model
CFA Practice Question
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.
Correct Answer: B0 = 500 x 50% = $250 million.
RI = E1 - r B0 = 50 - 0.15 x 250 = $12.5 million.
RI = E1 - r B0 = 50 - 0.15 x 250 = $12.5 million.
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 |