The following earnings and dividends forecasts made at the end of 2016 for a fir

Question

The following earnings and dividends forecasts made at the end of 2016 for a firm with $16 book value per common share at that time. The firm has a required equity return of 9%

[a,Forecast book value per share, return on common equity (ROCE), and residual earnings for each year, 2017-2021.]--Answered

[b. Based on your forecasts, do you think this firm is worth more or less than book value? Why?]-Answered

As we can see in the last row forecasted residual earnings are positive. Therefore the shares of this firm is worth more than the book value

C, Assume that residual earnings will grow at a rate equal to growth in historical GDP

(4%), after 2021. What is the value of one share in the company? -Need help with this one!

1) 2017 2018 2019 2020 2021 EPS 3.26 4.18 3.38 4.32 4.71 DPS 0.78 0.97 1.08 1.17 1.32 Book Value = Prior Year BV + EPS - DPS 18.48 21.69 23.99 27.14 30.53 ROCE = EPS / Prior year BV 20.38% 22.62% 15.58% 18.01% 17.35% RE = EPS - (Prior year BV x9%) $1.82 $2.52 $1.43 $2.16 $2.27 Year 2017 2018 2019 2020 2021 RE 1.82 2.52 1.43 2.16 2.27 Discounting Factor 0.92 0.84 0.77 0.71 0.65 0.65 Value 1.67 2.12 1.10 1.53 1.48 30.69 38.59 Terminal Value 7.216 Value of 1 share

Explanation / Answer

Calculate Value of one share :-

2022 :-

= 2.27 + (2.27 * 4%)

= 2.36

Year RE Dis. Factor @9% Value 2017 1.82 0.92 1.67 2018 2.52 0.84 2.12 2019 1.43 0.77 1.10 2020 2.16 0.71 1.53 2021 2.27 0.65 1.48 2022 2.36 0.60 1.42 Terminal Value 47.216 0.60 28.33 Value of one Share 37.65

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