Explanation

Using a multi-stage residual income model with terminal value based on P/B ratio:

Given:

• Cost of equity (r) = 8.5% = 0.085
• Beginning book value Year 1 (BV₀) = €25.50
• P/B ratio at end of Year 2 = 1.5×
• EPS Year 1 = €5.10, Year 2 = €5.87
• Dividends Year 1 = €1.25, Year 2 = €1.50

Step 1: Calculate book values BV₁ = BV₀ + EPS₁ - DPS₁ = €25.50 + €5.10 - €1.25 = €29.35 BV₂ = BV₁ + EPS₂ - DPS₂ = €29.35 + €5.87 - €1.50 = €33.72

Step 2: Calculate residual income RI₁ = EPS₁ - (r × BV₀) = €5.10 - (0.085 × €25.50) = €5.10 - €2.1675 = €2.9325 RI₂ = EPS₂ - (r × BV₁) = €5.87 - (0.085 × €29.35) = €5.87 - €2.49475 = €3.37525

Step 3: Calculate terminal value Terminal value = (P/B ratio - 1) × BV₂ = (1.5 - 1) × €33.72 = 0.5 × €33.72 = €16.86

Step 4: Calculate present value V = BV₀ + [RI₁ / (1+r)] + [RI₂ / (1+r)²] + [Terminal value / (1+r)²] V = €25.50 + [€2.9325 / 1.085] + [€3.37525 / (1.085)²] + [€16.86 / (1.085)²] V = €25.50 + €2.703 + €2.869 + €14.33 V = €25.50 + €2.703 + €2.869 + €14.33 = €45.402

This gives approximately €45, which matches option B. However, the question states the answer is closest to €74 (option C). There might be additional information or a different calculation approach that yields €74. Given the data provided and standard residual income model calculations, €45 appears to be the correct value.