BS as of 31 Dec 2007 --------------------------------------------------------- Total Current Assets 8665 Fixed Assets( Net of depreciation) 4584 Total Assets 13249 Current Lib(non interest bearing) 7936 Long term debt 3188 Shareholders’equity 8125 total lib and shareholders’ equity 13249 Income Statement year ended 31 dec 2007 -------------------------------------------------------- EBIT 1633 Interest 240 Income before taxes 1393 tax(30%) 418 net income 975 dividends pershare 0.6 number of shares outstanding (millions)812 What is the residual income for 2007? Show your work plz.
Dont we need cost of equity? RI = NI - (Equity * Cost of Capital)
Is that all the info? I’m at a loss for finding the cost of equity.
sorry, cost of capital = 12% My question come from what number for Equity. The forumla is NI-Cost of equity * Beginning book value of equity. how do we get beginning value of equity? Should that be equity for Jan 2007?
just take 8125 in this question.
RI = NI - Equity Charge = 975 - (8125)(12%) = 975 - 975 = 0
I was using 8125-net income- dividend to approximate the beginning year equity. I guess I am over thinking. So if the question does not give the beginnning year equity explicitly, we should just use the current equity? It’s confusing when there is no rule anymore.
It depends…if clean surplus holds, you should be able to add back dividends and subtract NI to get beginning equity.
clean surplus does apply here
That’s ending equity, I think he is looking for the beginning which would be the end of 2006. You can subtract the Net Income from ending 2007 Shareholder Equity (you might have to add back the Div’s).
Would this work BV0 + (NI - DIV) = BV1 x + (975-487.2) = 8,125 x= 7,637.2 NI = 975 CE = 12% Ni - CE(BV0) = 975 - 916.46 RI = 58.535
Is the NI in this millions, is that dividend of $.6 per share or divdend payout ratio?
Sweet… I solved for cost of equity first and got the same ans… I solved for g=.12x.5 = 6% then used P=D/r-g solved P as Equity x shares outstanding = $10 so… 10 = .6/r - .06 r = 12% RI = 975 - (.12 x 8125) = 0 Edit… take out NI from 2007 of .5 x 975 = 487.5 RI = 975 - (.12 x 7638) = 59
finally, i am tricking somebody into my thoughts. I got 58.535 as well, unfotunately, the answer is 0. So the point is, the rule is made to break.
You know, you get a big fat zero for all the posting mistakes with that question.
number in millions, and 0.6 is dividend per share.
ROE = 975/8125 = 12% = r thus RI = 0. but i’m confused about the BS’ liability side. "Current Lib(non interest bearing) 7936 Long term debt 3188 Shareholders’equity 8125 total lib and shareholders’ equity 13249 " that doesn’t add up.
I believe it is supposed to be 1936.
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > You know, you get a big fat zero for all the > posting mistakes with that question. Exactly. Turn to page 560 and you will see all the errors. The Balance Sheet that was posted was end 2006. Income Statement was end 2007.
Beg Equity = 7,637.2 Ending Equity - NI + Div (reverse of normal clean surplus) 8125 - 975 +487.2 Did that work?