Letting it go. I understand what you are saying but something is not clicking. I will find a simliar question ans post later. thanks for the explanations though.
I went Assets = 53.2 - 5.59 (subtracting off net income which flowed to cash, accruals, and RE) Liabilities = 27.8 = 53.2-5.59 - 27.8 = 19.81 = initial book val per share = 19.81 / 8 = 2.47625 Plugging that in I get 11.26294355 (which is very close)
I’m not seeing the confusion? B0 stands for “Book Value NOW” (Just like S0 means Stock Price NOW). We aren’t forward looking here; we’re analyzing everything as of the report date. Thus, B0 = (A-L)/#shares That gives you Book Value per Share as of the report date.
planner Wrote: ------------------------------------------------------- > Makes you think a little… > > ABC reported the following for the end of its > fiscal year: > > Revenues = $40.8 million. > Pretax income = $8.6 million. > Assets = $53.2 million. > Liabilities = $27.8 million. > Dividends per share = $0.35. > Shares outstanding = 8 million. > Tax rate = 35%. > > The beta for ABC is 1.2, the current risk-free > rate is 4.5%, and the expected return on the > market is 12.5%. What is the value of the shares > using a single-stage residual income model? > > A) $23.23. > > B) $8.10. > > C) $11.28 BV+(ROE-R)*BV/(R-g) So we need all of these components… ROE = (8.6*(1-.35)/(53.2-27.8) = .22 r= .141 g = Roe*rr -> Find EPS --> 5.59/8 = .699 rr = (1-.35/.699)~.5 .5*.22 =.11 BVPSo= (53.2-27.8)/8 = 3.175 So now we can do the calc. 3.175+(.22-.141)*3.175/(.141-.11) = 11.266 So I guess C.