- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 30. Residual Income Valuation
- Subject 3. The residual income valuation model

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**CFA Practice Question**

An analyst is forecasting residual income for a company that has just announced its annual earnings per share of last fiscal year at $9.2. Analysts expect its earnings to grow at 13.5% a year indefinitely. The company is expected to pay out 30% of its earnings. Its current book value per share is $25. The cost of equity is 20%. The residual income of the company at the end of the third fiscal year is estimated to be ______.

A. $5.3

B. $5.5

C. $5.6

**Explanation:**The following table demonstrates calculation of residual earnings for each of the next 3 fiscal years:

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**User Contributed Comments**
3

User |
Comment |
---|---|

yesficom |
BVPS FY1= 25*.12 = 3 |

flape |
i think 12% is a typo. it has to be 20% and that corresponds with the calc in the chart, |

danlan2 |
BP1=25, BP2=BP1+9.2*1.135*0.7, BP3=BP2+9.2*1.135^2*0.7 =25+9.2*1.135*0.7+9.2*1.135^2*0.7 =40.6 NI-BP3*0.2 =9.2*1.135^3-BP3*0.2 =5.33 |