Homework Answers
| Year 1 | Year 2 | Total | |
| Net income | 3.75 | 4.25 | |
| Less:Equity charge (equity* cost of equity) | 19.50*12%= 2.34 | 21*12%= 2.52 | |
| Residual income | 1.41 | 1.73 | |
| Present value factor at 12% | .89286 | .79719 | |
| Present value (residual income *PVF12%) | 1.25893 | 1.37914 | 2.63807 |
V0= Book value today + present value of residual income
= 18 + 2.63807
= $ 20.63807 (rounded to 20.64)
correct option is "2" - 20.94 (approx to 20.64)
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