CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

The total asset value for ABC Corp. is $12 million, of which 40% is financed with equity while the remainder is financed with debt. The cost of equity is 8% and the tax rate is 40%. If the company reports a net income of $2.4 million, what is the best measure of the firm's residual income?

A. ($1,440,000)
B. $1,440,000
C. $2,016,000
Correct Answer: C

Residual Income = Net Income - Equity Charge = 2,400,000 - [8% of (40% of 12,000,000)] = 2,016,000

User Contributed Comments 1

User Comment
samjhyip There is no mention about the cost of debt here. So I guess that the default method to use would be the equity charge method?
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