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Group 2

Leader :

Elka Putri Kusuma . W


Group member :

Efriliani Hazanah Zahra


Fauziah Rabbani


Fitri Choerunisa Fauzi


Isna Rifka Utami


Question 1

The following are earnings and dividend forecasts made at the end of 2012 for a firm with
$20.00 book value per common share at that time. The firm has a required equity return of
10 percent per year.

2013 2014 2015

EPS 3.00 3.60 4.10
DPS 0.25 0.25 0.30

a. Forecast return of common equity (ROCE) and residual earnings for each year, 2013- 2015.

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

Question 2

The following are ROCE forecasts made for a firm at the end of 2010.

2011 2012 2013

Return of 12.0% 12.0% 12.0%
common equity

ROCE is expected to continue at the same level after 2013. The firm reported book value of common equity of $3.2
billion at the end of 2010, with 500 million shares outstanding. If the required equity return is 12 percent, what is the
per-share value of these shares?

Question 3

An analyst presents you with the following pro forma (in millions of dollars) that gives her forecast of earnings and
dividends for 2013-2017. She asks you to value the 1,380 million shares outstanding at the end of 2012, when
common shareholders' equity stood at $4,310 million. Use a required return for equity of 10 percent in your

2013E 2014E 2015E 2016E 2017E

Earnings 388.0 570.0 599.0 629.0 660.4
Dividends 115.0 160.0 349.0 367.0 385.4
a. Forecast book value, return on common equity (ROCE), and residual earnings for each of the years 2013- 2017.

b. Forecast growth rates for book value and residual earnings for each of the years 2014- 2017.

c. Calculate the per-share value of the equity from this pro forma. Would you call this a Case 1, 2, or 3 valuation?

d. What is the premium over book value given by your calculation? What is the P/B ratio?

Question 4
The following forecasts of earnings per share (EPS) and dividend per share (DPS) were made at the end of 2012 for
a firm with a book value per share of $22.00:

2013E 2014E 2015E 2016E 2017E

EPS 3.90 3.70 3.31 3.59 3.90
DPS 1.00 1.00 1.00 1.00 1.00

The firm has an equity cost of capital of 12 percent per annum.

a. Calculate the residual earnings that are forecast for each year, 2013 to 2017.

b. What is the per-share value of the equity at the end of 2012 based on the residual income valuation model?

c. What is the forecasted per-share value of the equity at the end of the year 2017?

d. What is the expected premium in 2017?

Question 5

Black Hills Corporation is a diversified energy corporation and a public utility holding company. The following
gives the firm's earnings per share and dividends per share for the years 2000-2004.

1999 2000 2001 2002 2003 2004

EPS 2.39 3.45 2.28 2.00 1.71
DPS 1.06 1.12 1.16 1.22 1.24
BPS 9.96

Suppose these numbers were given to you at the end of 1999, as forecasts, when the book value per share was $9.96,
as indicated. Use a required return of 11 percent for calculations below.

a. Calculate residual earnings and return of common equity (ROCE) for each year, 2000-2004.

b. Based on your analysis, give a target price at the end of 2004.

Question 6

In September 2008 the shares of Dell, Inc., the computer maker, traded at $20.50 each. In its last annual report, Dell
had reported book value of $3,735 million with 2,060 million shares outstanding. Analysts were forecasting earnings
per share of $1.47 for fiscal year 2009 and $1.77 for 2010 Dell pays no dividends. Calculate the per-share value of
Dell in 2008 based on the analysts' forecasts, with an additional forecast that residual earnings will grow at the
anticipated GDP growth rate of 4 percent per year after 20l0. Use a required return of 10 percent.

Question 7

In April 2005, General Motors traded at $28 per share on book value of $49 per share. Analysts were estimating that
GM would earn 69 cents per share for the year ending December 2005. The firm was paying an annual dividend at
the time of $2.00 per share.
a. Calculate the price-to-book ratio (P/B) and the return on common equity (ROCE) that analysts were forecasting
for 2005.

b. Is the P/B ratio justified by the forecasted ROCE?

c. An analyst trumpeted the high dividend yield as a reason to buy the stock. (Dividend yield is dividend/price.)
"A dividend yield of over 7 percent is too juicy to pass up," he claimed. Would you rather focus on the ROCE or on
the dividend yield?

Answer :

3. 2013E 2014E 2015E 2016E


a. Forecasted book values, ROCE, and residual earnings are given in the completed pro forma above. Book value
each year is the prior book value plus earnings and minus dividends for the year. So, for 2014 for example,Book
value = 4583 +570 – 160 = 4,993. The starting book value (in 2012) is 4,310. Residual earnings for each yearis
earnings charged with the required return in book value. So, for 2014,RE is 570 – (0.10 × 4,583) = 111.7.

b. Forecasted growth rates in book value and residual earnings are given above.

c. The growth rate in residual earnings is 5% after 2015. Assuming this growthrate will continue into the future, the
valuation is a Case 3 valuation with thecontinuing value calculated at the end of 2015: