PROBLEM 11–4 After careful financial statement analysis, we obtain these predictions for Colin Technology:

Beginning Beginning Year Net Income Book Value Year Net Income Book Value 1............. $1,034 $5,308 5 ................. $1,278 $6,728 2............. 1,130 5,292 6 .................. 1,404 7,266 3............. 1,218 5,834 7 .................. 1,546 7,856 4............. 1,256 6,338 Colin Technology’s cost of equity capital is estimated at 13 percent.

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 Year 1.