Question

Consider the following per share information for Marlow Company:

Year	1	2	3
Beginning BV	70	76	82
Net income	10	11	12
Dividends	4	5	6
Ending BV	76	82	88

The required return on equity is 12% , and Marlow's trailing PE ratio at the end of year 3 should be 12.0.

Using the residual income model, what is Marlow’s current value per share? (Enter an amount to the nearest $0.01. Leave the $ sign off.)

Answer 1

Solution: According to the Residual Income model, the intrinsic value os calculated as:

Residual Income = Net Income - Equity Charge

Residual Income = Net Income - Required Return*Beginning Book Value

The calculations are done as follows:

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