Question

After careful financial statement analysis, we obtain these predictions for Colin Technology:


Colin Technology’s cost of equity capital is estimated at 13%.

Required:
a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colin’s value at the beginning of Year 1.
b. Determine Colin’s PB ratio using the results in (a). Colin’s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?
c. Determine Colin’s PE ratio using the results in (a). Colin’s actual market-based PE ratio is 10. What do you conclude from this PE comparison?
d. If we expect Colin’s sales and profit margin to remain unchanged after Year 7 with a stable book value of $8,506, use the accounting-based equity valuation model to estimate Colin’s value at the beginning of Year1.


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  • CreatedJanuary 22, 2015
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