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Basic Question 4 of 4
A company has a book value of $5 per share. It is expected to earn $0.60 per share in perpetuity, pays out all of its earnings as dividends, and has a required rate of return on equity of 10%. Calculate the value of the stock using the dividend discount model and the residual income model.
User Contributed Comments 2
| User | Comment |
|---|---|
| tengo | use the single stage model with g=0% and roe=12% and bv =5 |
| Rotigga | Or alternatively: ROE = NI / Equity BV = 0.6 / $5 = 0.12 V0 = B0 + (ROE - r) * B0 / r = 5 + (0.12 - 0.1)*5 / 0.1 = $6 |
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Learning Outcome Statements
describe the uses of residual income models;
calculate the intrinsic value of a common stock using the residual income model and compare value recognition in residual income and other present value models;
CFA® 2025 Level II Curriculum, Volume 4, Module 24.