CFA Level 2 - Equity Session 12 - Reading 45 Residual Income Valuation-LOS d

University:
CFA Institute
Course:
CFA Level 2 | Equity
Academic year:

2023
Views:

82

Pages:

2
Author:

anon

CFA Level 2 - Equity Session 12-Reading 45 Residual Income Valuation-LOS d (Practice Questions, Sample Questions) 1. Assuming that the growth rate is less than the required rate of return (r), an increase in return on equity (ROE) will cause value in a residual income (RI) model to: A) there is insufficient information to derive the effects of increasing ROE on RI. B) increase if ROE is greater than the required rate of return. C) decrease if ROE is greater than the required rate of return An increase (decrease) in ROE increases (decreases) value if the ROE exceeds the required rate of return. This is revealed by the RI valuation expression: V0 = B0 + [(ROE – r) / (r – g)]B0 2. Professor Cliff Webley made the following statements in his asset-valuation class: Statement 1: “Over time, a company’s residual income growth tends to approach the industry average.” Statement 2: “If actual return on equity equals required return on equity, the residual income model sets the company’s proper market value equal to its book value.” Statement 3: “The single-stage residual income model should give you the same valuation as the Gordon Growth model.” Which of Webley’s statements is least accurate? A) Statement 2. B) Statement 1. C) Statement 3 Over time, a company’s residual income growth tends to approach zero. It is unlikely that an industry’s average growth rate is zero, so Statement 1 is questionable. The other two statements are accurate 3. The single-stage residual income model values a company at: A) book value times a factor determined by the discount rate. B) book value plus the terminal value discounted at the weighted average cost of capital. C) book value plus the present value of the firm’s expected economic profits The single-stage residual income model values a company at book value plus the present value of the firm’s economic profits, or the additional value generated by the firm’s ability to produce returns higher than the cost of equity 4. Tobin’s Q is best expressed as: A) (Market Value of Debt + Book Value of Equity) / Replacement cost of total assets. B) (Market Value of Debt + Market Value of Equity) / Replacement cost of total assets. C) (Market Value of Debt + Book Value of Equity) / Book value of total assets Tobin’s Q is (Market Value of Debt + Market Value of Equity) / Replacement cost of total assets