Page 31 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 32.h: Explain continuing residual income (CRI) and READING 32: RESIDUAL INCOME VALUATION
justify an estimate of continuing residual income at the
forecast horizon, given company and industry prospects.
MODULE 32.4: CONTINUING RESIDUAL INCOME

#1: RI persists at the current level forever (ω = 1)

#2: RI drops immediately to Zero (ω = 0)

#3: RI declines over time to zero (0<ω<1)

#4: RI declines to long-run level in mature industry (does not rely on the formula or ω)

If per single-stage RI model, P = Bo + PV (of RI) ; then
PV (of RI in year T) = P − B T
T
But we know P = B × (forecasted price-to-book ratio)
T
T

Lets apply these…