Residual income a terror for me

[vicky_cool400]

Help me
I just cant understand Resdual income chapter. I am getting ovr 70% questions wrong, Any god video or tips for this chapter ? plz

 

[S2000magician]

What sorts of mistakes are you making? Are you making the same mistakes every time, or a new, novel mistake every time? Knowing where you are will make pointing you in the right direction easier.

 

[vicky_cool400]

I am making mistakes in both theory q and practical questions. when doing q bank

 

[bloodline]

You are not alone on this. I just can’t seem to figure out why something that is conceptually quite easy could yet be so complicated.

 

[vicky_cool400]

Plz explain concepts ans when to apply and to whom
a) Discount of marketability and control
b) Control premium
Also how to apply in practical questions

 

[S2000magician]

vicky_cool400 wrotelz explain concepts ans when to apply and to whom
a) Discount of marketability and control
b) Control premium

For a privately held company, the price you pay for the stock would be less than for the stock of a comparable, publicly held company because of the low liquidity (marketability) of the stock: it will be harder to sell that stock quickly at a fair price than if there were a ready market for it.
If you have a minority position in a privately held company, the price of the stock will be less than for the stock of a comparable, publicly held company for lack of control; if you have a majority position, the price will be more than for the stock of a comparable, publicly held company because you control. The publicly held company’s stock price is the same for everyone, and is some homogenized average of prices with a lack-of-control discount and a control premium.

vicky_cool400 wrote:Also how to apply in practical questions

I would imagine that they’ll be more conceptual, not computational. They’ll likely give you a scenario and you’ll have to decide whether there will be a premium or a discount for the shares. But that’s just a guess on my part.

 

[Bubbaburst]

In an acquisition setting, you would see a premium paid to gain a control position of a target firm. Shares that trade on an exchange are for minority holders and therefor if you are using public shares to arrive at valuation multiples, no discount for control is needed (assuming you are valuaing a non-controlling interest).
If you are using comparable transactions, on the other hand, the multiples you have are from a control perspective (assuming that transactions were for controlling interests, which is typical). In this case, you would need to apply a discount for lack of control (DLOC) to arrive at comparable multiples for your subject firm.

 

[vicky_cool400]

Comparable transactions ?

 

[mfreema2]

If you have the Schweser videos, Mark Lefebvre worked perfectly for me. Watch that series and it becomes easy. Also, focus on the procudure–do a spreadsheet similar to an amortization schedule:
Beginning BV
+Earnings (or EPS)
Less Dividends
=Ending BV (this becomes the next year’s opening BV)
Earnings (make the entry again)
Equity Charge (r x Beginning BV)
Residual Income (Earnings minus Equity Charge)
Repeat this for the number of years the problem gives you, and then: Beginning BV + Present value of each year’s RI discounted at r and that’s your stock value. A timeline also helps. Hope this gets you through!