what is the stock price at the end of year three based on residual income

CFA Level II
#1

what is the stock price at the end of year three based on residual income, if at the end of year 3 ROE is less than Re… I guess purely fromt he formula it should be less than BV… But think from the persistence factor angle, and it seems that the if residual income becomes negative, stock price should be same as BV… I guess i over thought

#2

They mentioned persistance factor?

#3

irf roe < reqd return- which was the case P=BV

#4

No they didn’t … i over thought that persistence factor is the indication of continuation of RI… ANd persistence only has 0 as minimum value…

#5

Chowder, can you elaborate,… are you sugeesting the answer is that the Price will be equal to BV

#6

lower than BV was the answer. ROE < R which means RI will be negative which will have a drag on BV.

#7

Umm, chowder is wrong the answer was lower than BV!

#8

chowder Wrote: ------------------------------------------------------- > irf roe < reqd return- which was the case P=BV No. P< BV derived from the P = Bo + [(ROE - r)/(r-g)]Bo formula.

#9

If ROE < req rate of equity, you are destroying value. Hence price will be less than book value.

#10

i am wrong- the BV will be lower — damn -1 for me