Residual Income - Equity Valuation Model

[Sanjay Sachdev]

Hey Guys,
I got confused on one of the RI Valuation Model which is (RI) + (Pt-Bt) / (1+r) , need ur help here : Why we are adding “Market premium” i.e (Pt-Bt) in the above equation while calculating Terminal value ?

 

[S2000magician]

Because when the stock is sold, it may be sold for a higher price than the book value per share. The market premium represents that difference, and it’s discounted to the present.

 

[Sanjay Sachdev]

You’re awesome ! Thank you once again

 

[S2000magician]

Sanjay Sachdev wrote:You’re awesome!

Well, my dog thinks so.
(My horse and my cats usually think so only when I give them something to eat.)

Sanjay Sachdev wrote:Thank you once again

You’re welcome.

 

[Sanjay Sachdev]

One more doubt here i have is, whenever there is persistent factor mentioned in the question then we are not using market premium, does this mean that at the end the stock is sold at BV (0- market premium) ? or the persistentence factor covering the market premium ?