# Mendosa Case - Question about residual income calculation

Hi guys, I have a question with Mendosa case - Question 6.

The answer said “residual income in year 5 = 5.4*1.155”.

I don’t understand why we need to multiply 1.155, rather than 1.154?

The residual income in Year 1 = Book value of equity in year 0 * (ROE - r)

Please give me some hints.

Thank you.

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there are some wonderful people like S2000 to answer…but u have to ask very clearly…we are usually so engrossed in ques that we assume the reader is on the same ground :)

Hi,

The question is to calculate “the contribution that the terminal value of the residual income stream in 5 years will contribute to the current value of equity”.

As you have already got current year RI = Current NI - Begining BV of Equity capital x Cost of equity = 8 - (12,4% x 20,97) = 5,4

Take this current year to next 5 years = 5,4 x 1.155 as annual growth rate of RI is 15%

I thinks it’s pretty clear. Why 1.154?