Simple Forecasting and Valuation (Medium)

An analyst uses the following summary balance sheet to value a firm at the end of 2009

(in millions of dollars):

The analyst forecasts that the firm will earn a return on net operating assets (RNOA) of 12 percent in 2010 and a residual operating income of $91.4 million.

a. What is the implied rate of required return for operations that the analyst is using in his residual operating income forecast?

b. The analyst forecasts that the residual operating income in 2010 will continue as a perpetuity. What value does this imply for the equity?

c. Calculate the forecast of residual earnings (on common equity) that is implied by these forecasts. The firm’s after-tax cost of debt is 6.0 percent.

2009 2008 Net operating assets 4,572 3,941 Net financial obligations 1,243 1,014 Common shareholders' equity 3,329 2,927