I am confused about the calculation of Residual income. In one question they used expected EPS to find residual income ( EPS - Bo*r) and then when the question came about finding the implied growth rate given current market price they used (ROE - r)B0. Not sure what to use when it comes to valuing using residual income. Thanks for the help!
Added note. ROE is expected ROE, and EPS is consensus EPS
They both will give you residual income. Just remember to use beginning of period BV. What is your question exactly?
They dont give the same answer. B(t-1) = 32.16, expected ROE 13%, EPS consensus $6.15, re = 12.8%. Find residual income. Answer = 2.03 ( 6.15 - 4.12) Find implied growth = 32.16 (ROE - r) = different answer. Any clue?
** Implied growth answer, is simply the start. G ends up to equal 10.53% with current market price of $35