CFA Practice Question

There are 201 practice questions for this study session.

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, B1 = B0 + E1 = $50 + $6 = $56; and B2 = B1 + E2 = $56 + $8 = $64.

Intrinsic Value = B0 + (E1 - r x B0) / (1 + r) + (E2 - r x B1) / (1 + r)2 + (P2 - B2) / (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.

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!
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