Your client has requested advice as to whether to keep or not their current equity holding in Richmond plc. The following information is available to you for the purposes of your analysis.
i. Earnings available for ordinary shareholders for the year 2019 were £110m.
ii. The opening net book value for the year 2020 is £600m.
iii. Forecast revenue for 2020 is £280m and is expected to grow by 10% per annum in 2021 and 2022.
iv. Net operating margin for the years 2020 –2022 is forecast to be 42%.
v. Post 2022 the future growth of residual earningsis forecast to be 3% per annum.
vi. Richmond plc’s cost of equity is estimated to be 8%.
vii. The shares priceof Richmond plc at the start of 2020 is £16.00 per share.
viii. The number of shares in issue is 110 million.
ix. Richmond plc has never paid a dividend and intends to continue with this policy for the foreseeable future.
REQUIRED:
a)Estimate the value of Richmond plc’s share price as at 1 January 2020 using the:
i. Residual Earnings Valuation Model (REVM) and
ii. Abnormal Earnings Growth Model (AEGM)

Explain possible reasons for the difference between the book value per share and your estimates of Richmond plc’s share price.

Explain the relative merits of the Residual Earnings Valuation Model (REVM) and the Abnormal Earnings Growth Model (AEGM) in valuing a company’s equity.