- 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**

The ROE of a firm in 2011 was 20%. The beginning book value per share was $20. Its cost of equity is 15%. Calculate residual income.

A. $1

B. $0

C. -$1

**Explanation:**RI = (ROE

_{1}- r) x B

_{0}= (0.2 - 0.15) x $20 = $1.

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**User Contributed Comments**
1

User |
Comment |
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dimanyc |
Since ROE>r, RI has got to be positive. Hence, A. |