# Residual Income

Here’s a good one that was inspired from a different question I saw a bit earlier… ABC Company’s Projected 2008 Information Assets: \$60,000,000 Dividend Payout: 70% EBIT: \$6,000,000 Shares Outstanding: 2,000,000 EPS: \$1.15 Cost of Equity: 11% Debt/Equity: 2.00 Tax Rate: 36% The company’s capital structure comprises only debt and common stock. Assuming that the clean surplus rule is not violated, the projected residual income per share in 2008 is closest to: a) \$0.055 b) \$0.088 c) \$0.175 d) \$1.150

D/E = 2/1 A = L + E 60 = 40 + 20 BVPS(2007) = 20/2 + 1.15 - 0.805 = 9.655 RI(2008) = EPS(2008) - ®*(BVPS(2008)) = 1.15 - 0.11*9.655 =1.15 - 1.06205 =0.08795 B? Did I mess it up?

I don’t get it. How do you know they earned 1.15 last year? I think my brain is done.

Matter of fact, I don’t get 10 + 1.15 - .805 = 9.655 and not 10.345

Niblita75 Wrote: ------------------------------------------------------- > Matter of fact, I don’t get 10 + 1.15 - .805 = > 9.655 and not 10.345 BVPS(2008) = BVPS(2007) + EPS(2008) - DIV(2008) 10 = BVPS(2007) + 1.15 - 1.15*0.70 BVPS(2007) = 10 - 1.15 + 1.15*0.70 =10 - 1.15 + 0.805 =9.655

I may just call it a night after that . . .

I think the calculation of the 2007 BV/share is actually… BV2008 = BV2007 + EPS 2008 - DIV 2008 Solving for BV 2007 = BV 2008 - (EPS 2008 - DIV 2008) Plug in values = \$20,000,000Equity/2,000,000 shares - (1.15 - (0.7*1.15) = \$10 - (0.345) = \$9.655

haha! you already got to this…man you’re fast dinesh.

I didn’t quite get it Based on you guys’ calculation: BVPS(2007) = 10 - 1.15 + 1.15*0.70 You assume the 1.15 is eps in 2007, but the problem said this 1.15 is projected eps in 2008. So Did I get something wrong here?

tennisboy Wrote: ------------------------------------------------------- > I didn’t quite get it > Based on you guys’ calculation: BVPS(2007) = 10 - > 1.15 + 1.15*0.70 > > You assume the 1.15 is eps in 2007, but the > problem said this 1.15 is projected eps in 2008. > > So Did I get something wrong here? tennisboy, BV2008 = BV2007 + EPS 2008 - DIV 2008 Solving for BV 2007 = BV 2008 - (EPS 2008 - DIV 2008) Plug in values = \$20,000,000Equity/2,000,000 shares - (1.15 - (0.7*1.15) = \$10 - (0.345) = \$9.655

So here you assume BV 2007 is end of period BV (end of 2007)? Sorry, just want to clarify this. I had thought it was beginning period BV. I think the problem itself is not that clear.

good question

The CFA question will not be this convoluted. I agree that the EPS given is projected.

Never mind.