After careful financial statement analysis, we obtain these predictions for Colin Technology: Colin Technologys cost of equity
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.
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
Step by Step Answer:
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild