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CFA Level 2
Equity Investments

Impact of Positive Residual Income on Equity Value

Very Easy Equity Valuation Applications Residual Income Valuation

Alice is analyzing the stock of XYZ Inc. using the Residual Income Valuation method. She identifies that the company's return on equity (ROE) is higher than its cost of equity. Alice knows that when this condition is met, the residual income is positive.

Given the positive residual income, how does this affect the value of equity according to the Residual Income Valuation model?

Hint

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