- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 26. Residual Income Valuation
- Subject 6. Multistage Residual Income Valuation
CFA Practice Question
Consider the following information:
- ROE = 12%.
- Required rate of return on equity = 10%.
- Dividend payout ratio = 60%. The company's justified P/B, using the residual income model and a constant growth rate assumption, is ______.
A. 1.56
B. 1.38
C. 1.30
Explanation: g = b x ROE = (1 - 0.60) x 0.12 = 0.048.
P0/B0 = (ROE - g) / (r - g) = (0.12 - 0.048) / (0.1 - 0.048) = 1.38.
or P0/B0 = 1 + (ROE - r) / (r - g) = 1 + (0.12 - 0.1)/(0.1 - 0.048) = 1.38.
P0/B0 = (ROE - g) / (r - g) = (0.12 - 0.048) / (0.1 - 0.048) = 1.38.
or P0/B0 = 1 + (ROE - r) / (r - g) = 1 + (0.12 - 0.1)/(0.1 - 0.048) = 1.38.
User Contributed Comments 1
| User | Comment |
|---|---|
| jsp2012 | Or P/B = (ROE * Payout rate) / (r - g) |