When calculating residual income, should I multiply required return on equity by last years BV or this years? Can someone please clear up this concept? Thanks!
The answer is last year’s BV.
Please see the formula in curri and schweser carefully, you will see it states
For example: Residual income of 2012 = Net income of 2012 - cost of equity x BV of equity of 2011 ( or BV at the beginning of 2012).
That’s what I expected however in schweser book 2 exam 3 number 99 they use this year’s book value…
that is so wrong. Just imagine… you are comparing how much earnings your capital was able to generate (and its cost). so obviously it has to be beginning capital, because ending capital means nothing. Its like taking this test… you will pass or fail based on what you know before the exam… not after… HAHA… nice analogy i must say lol