CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Based on the following information, calculate ABC Company's residual income using equity charge method:

  • At the beginning of the fiscal period: debt - $150; equity - $250.
  • Net income of the period: $50.
  • Cost of equity: 15%.
  • Cost of debt: 6%.
  • Marginal tax rate: 35%.

Correct Answer: Equity charge = Cost of equity % x Book Value of Equity = 0.15 x $250 = $37.5.

It is essentially an adjustment of net income to reflect cost of all sources of capital, including equity.

RI = Net Income - Equity Charge = $50 - $37.5 = $12.5.

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