Eyster Corporation reported $10M in earnings and paid dividends of $3M for fiscal 2005.Return on equity and dividend payout are expected to remain constant for the foreseeable future. Net book value at the end of fiscal 2004 was 100M. Cost of equity is 10%. Using the residual income method, the intrinsic value of Eyster's stock at the end of 2005 should be:

Question

Quizplus · Accepted Answer

Residual Income = net income - (equity * cost of equity)
Residual Income for 2005 = $10M - [(100M + $3M dividend) * 10%] = $7M
Intrinsic Value = net book value + residual income = $100M + $7M = $107M

Therefore, the intrinsic value of Eyster's stock at the end of 2005 should be $107M, as per the residual income method.

Eyster Corporation Reported $10M in Earnings and Paid Dividends of $3M