- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 30. Residual Income Valuation
- Subject 6. Multistage residual income valuation

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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. The company is expected to trade with 30% premium to book value at the end of the second year. The required rate of return on equity is 10%. It is not expected to pay dividends. The company's intrinsic value per share is closest to______.

A. $68.76

B. $62.42

C. $80.92

**Explanation:**Since the company is not paying dividends, B

_{1}= B

_{0}+ E

_{1}= $50 + $6 = $56; and B

_{2}= B

_{1}+ E

_{2}= $56 + $8 = $64.

Intrinsic Value = B

_{0}+ (E

_{1}- r x B

_{0}) / (1 + r) + (E

_{2}- r x B

_{1}) / (1 + r)

^{2}+ (P

_{2}- B

_{2}) / (1 + r)

^{2}= $50 + ($6 - 0.10 x $50) / (1 + 0.10) + ($8 - 0.1 x $56) / (1 + 0.1)

^{2}+ (0.3 x 64) / (1 + 0.1)

^{2}= $68.76.

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**User Contributed Comments**
3

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

danlan2 |
Use CF with CF0=50, CF1=1, CF2=2.4+0.3*64, I=10 we get NPV=68.76 |

ThePessimist |
It's even easier to just find the terminal value as final book value times valuation premium:(50+6+8)*1.30 and then discount two years at 10%. |

volkovv |
Nice shortcut, ThePessimist! |