General Electric Co. reported a per-share book value of $10.47 in its balance sheet on December 31,

Question:

General Electric Co. reported a per-share book value of $10.47 in its balance sheet on December 31, 2004. In early 2005, analysts were forecasting consensus earnings per share of $1.71 for 2005 and $1.96 for 2006.

a. Calculate the value per share in early 2005 with a forecast that residual earnings will grow at a long-term growth rate of 4 percent, the average GDP growth rate, after 2006.

b. General Electric traded at $36 per share in early 2005. Construct abuilding block diagram, like that in Figure, displaying the components of this $36 price that are attributable to book value, short-term earnings expectations, and speculation about long-term growth.

c. What is the forecast of the residual earnings growth rate after 2006 that is implied by the $36 market price?

d. What are the forecasts of earnings growth rates for 2007 and 2008 that are implied by the $36 market price? Assume that the firm's dividend payout ratio of 50 percent will be maintained after 2006.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...