Question: General Electric Co. (GE) reported a per-share book value of $10.47 in its balance sheet on December 31, 2004. In early 2005, analysts were forecasting

General Electric Co. (GE) 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 GDP growth rate of 4 percent after 2006.

b. GE traded at $36 per share in early 2005. Construct a building-block diagram, like that in Figure 7.4, 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?

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