- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 24. Residual Income Valuation
- Subject 2. Commercial Implementations of the Residual Income Concept
CFA Practice Question
An analyst is reviewing the following information with regards to KLM Corporation:
B. Management performed poorly since MVA declined by $10 million.
C. Management performed very well since MVA increased by $22 million.
Which of the following gives the best assessment of management's performance for 2001?
A. Management performed poorly since MVA declined by $22 million.
B. Management performed poorly since MVA declined by $10 million.
C. Management performed very well since MVA increased by $22 million.
Correct Answer: B
Year 2000 = [(270) + (720)] - [(250) + (475)] = 265
Year 2001 = [(255) + (780)] - [(260) + (520)] = 255
Step 1. Calculate the MVA for each year. MVA = (Market Value of total capital) - (Book value of total capital)
Year 2000 = [(270) + (720)] - [(250) + (475)] = 265
Year 2001 = [(255) + (780)] - [(260) + (520)] = 255
Step 2. Management performance is a function of the change in MVA. ΔMVA = 255 - 265 = -10
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