jdane416 Wrote: ------------------------------------------------------- > Comment: > > RI model only measures return to equity holders > and therefore should use cost of equity and not > wacc. Not sure why we’re given values to compute > wacc here instead of the cost of equity… Nobody calculated wacc here… (furthermore you can’t calculate wacc here because you have no cost of debt given) We calculated cost of equity via CAPM.
ooh you’re right… for some reason I had this idea that CAPM was producing wacc values.
I think the answer should be $10.05, which is none of the above. You need to calculate the beginning book value: Beg BV = End BV - NI + Divs = 25.4 - 5.59 + 2.8 = 22.61 Beg BV per share is then 22.61/8 = 2.83 so then — Bo + [(ROE - r) * Bo]/r-g = 2.83 + [(.2201-.141) * 2.83/.141 - .11 you get $10.05 I get $11.28 if you plug in the ending bv per share but I think that is wrong. CP?
^Hallucination
Great…I didn’t know you could get BV from NI and ROE. I just took it from equity and # of shares out. Also, don’t recall the EBIT $#*% is in relation to RI last year. I guess I better do the CFAI questions…
You are taking B0 which is the value at the end of the year - and calculating for now, aren’t you? So your B0 already reflects the dividend.
EBIT (- interest and taxes) gives you NI
Book value/share = 3.175 (A-L)/shares ROE = .22; can also be found using the Dupont formula with the provided information r = .141 g = .11 (ROE)(retention ratio) So using these inputs you can: B + B [(ROE-r)/(r-g)] 3.175 + 3.175[(.22-.141)/(.141-.11)] Answer is C I skipped a lot of the calculations above b/c it looks like people already did them.
EBIT(1-T) - $WACC (in this case there is no debt) = 8.6(1-.35) - .141(53.2-27.8) = 2.0086 (RI @ 0) RIt / (r-g) = 2.0086/8 / (.141-.11) = 8.10 B0 = 25.4 = 53.2 - 27.8 / 8 = 3.175 V0 = 3.175 + 8.10 = 11.275
I am on my first cup of coffee but dont we need to back into Bo? I am assuming RE is included in the equity, which means you back it out right?
The B0 is after everything. The Dividend was only provided for you to get to the DPR and hence Growth rate in this problem .
Bo = equity/shares outstanding
oops…on the EBIT…Thanks cfaboston.
still having difficulties with this. @cfa, i get the Bo is equity/shares but the equity they give you in end of year, not beg of year. regardless, the answer I come up with is not a choice so I would choose 11.28 on test day. I will look some problems tonight an report back. Head is def cloudy this morning so excuse me if i am being stupid now.
and your are getting the share price at the end of that year…
right, share price at end of year, dont we need BVPS at beginning of year? i guess I am reading the question differently. they say the following is reported for ABC for the end of the fiscal year. So for some reason I am trying to get the BVPS at the beginning of the year and use that BV for the equation. nobody is with me on this?
I think you are missing a point - that B0, Equity is AFTER the fact of everything else. Already when they have given you the Assets and Liabs. the equity = Common Stock + Retained Earnings - (which already is inclusive of the effects on NI - Dividend). There is no other way to interpret this. If you did BVPS beginning of year and then tried to calculate share price - it is share price at the beginning of the previous year.
I am getting 11.26612903 = C?
So the formula is V0 = B0 + ((ROE - r)*B0 / (r - g) Ending book value = beg book value + net income - dividends The numbers quoted (assets and liab) for end of year book value numbers which do not include dividends (assets would have been subtracted by a cash amount and retained earnings would be lower) However, ending book value = beg book value + net income still applies So beg book value = ending book value - net income is what I think should be used in the equation I’m with you on this MrGrey, 90% 
Also, Book value (t-1)* ROE = Net Income Net Income / ROE = Book value (t-1) = 5.59 / 0.22 = 25.4 Apparently this calculates the correct book value, is this coincidence?
I did B0 = (A-L)/#NOSO