CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

In 2012 a firm achieved a net income of $50 million on total assets of $500 million. Half of its assets were financed with debt. Its cost of equity is 15%. Calculate residual income.
Correct Answer: B0 = 500 x 50% = $250 million.
RI = E1 - r B0 = 50 - 0.15 x 250 = $12.5 million.

User Contributed Comments 1

User Comment
danlan2 RI=EBIT(1-t)-WACC*Assets
=EBIT(1-t)-(Kd*Wd*(1-t)+Ke*We)*Assets

We know that Kd*Wd*Assets=interest
and Ke*We*Assets=Bv*Ke, then
RI=EBIT(1-t)-interest(1-t)-Bv*Ke
=NI-Bv*Ke

RI=NI-BV*Ke
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