Current stock price = 8.75
current BV = 7.25
expected ROE for next 4 years = 16%
required return on equity = 12%
persistence factor is 0.3 after year 4
Based on residual income model, intrinsic value is
Answer B. The solution uses the residual income in year 4 to calculate the pv of continuing residual income and adds it to RI(t3). Isn’t this ignoring the year 4 cashflow?