Residual Income valuation

CFA Level II Equities
#1

The present value of SS projected residual income for the next five years plus the beginning book value is 75 per share.Beyond that time horizon, the firm will sustain a residual income of 11.25 per share, which is the residual income for year 6. The cost of equity is 10% the justified value of SS common stock is closest to :

A 69.85

B 112.50

C 144.85

#2

so… it’s a two stage growth model and stage 1 has been done for you… V(0) = BV(0) + stage1discounted + stage2discounted V(0) = 75 + 11.25/0.1* 1/(1.1)^5 V(0) = 75 + 112.5 * 0.6209 V(0) = 144.85