1. Consider the RI multi-stage model. Using the info below, solve the model for the case where w = 1.
Consider the information given below.
• existing ROE = 20%; this will continue for the next 6 years.
• rS = 12%
• B0 = $18
• payout ratio = 30%

Using the residual income model, calculate the stock share value for each of the following possibilities.

(a) From the end of year 6 to infinity, the ROE = 12%.
(b) From the end of year 6 to infinity, the continuing residual income is perpetuity.
(c) From the end of year 6 to infinity, continuing residual income is determined by a persistence factor = 0.35
(d) At the end of year 6, the P/B ratio is projected to be 1.6.

Answer rating: 100% (QA)

ANSWER Explanation Part A 06 years 6 infinity years ROE 20 12 A retention ratio 30 30 B Growth rate ... View the full answer