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

Colin Technologyâ€™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 Colinâ€™s value at the beginning of Year 1.

b. Determine Colinâ€™s PB ratio using the results in (a). Colinâ€™s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?

c. Determine Colinâ€™s PE ratio using the results in (a). Colinâ€™s actual market-based PE ratio is 10. What do you conclude from this PE comparison?

d. If we expect Colinâ€™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 Colinâ€™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...

11th edition

Authors: K. R. Subramanyam, John Wild

ISBN: 978-0078110962