Terminal value perpetuity growth rate

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Reference no: EM131553654

Consider the Residual Income Valuation model and the sensitivity analysis you performed on your projects by varying the cost of equity and the terminal value perpetuity growth rates. Suppose you were looking at the valuations of XYZ company in a sensitivity analysis table and find the price at the 15% Ke line to be $23.50 per share when a -10% terminal value growth rate is use but $29.00 per share when you move to a -40% terminal value growth rate for the same cost of equity. Which one of the following must be true?

A. The terminal value perpetuity begins as a negative value

B. The terminal value perpetuity begins as a positive value

C. The terminal value perpetuity begins at zero

D. Year by Year residual income is increasing

E. Year by Year residual income is decreasing

Reference no: EM131553654

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