Company A's earnings declined significantly during the 2020 financial year during but will, according to an analyst's estimate, recover to R23.00 per share in 2021. In the past, Company A has been able to earn an average return on equity (ROE) of 20%. Company A is currently trading at R215.00 per share. You are provided with selected financial information from Company A's financial statements in the table below:

 

1.1  Calculate Company C's residual income for 2021.

 

1.2 Calculate the intrinsic value per share for Company A, using the single- stage constant-growth residual income model. (3)

 

1.3 Calculate Company A's justified price-to-book value. 

1.4 Calculate Company A's leading and trailing P/E ratios. 

 

1.5 Evaluate Company A's valuation relative to its peers and intrinsic value. Motivate why a portfolio manager should or should not consider including Company A in an equity portfolio. 

 

1.6  Based on the information in the table, how is Company A's earnings yield expected to change? Motivate your answer without performing any calculations.

 

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Item Book value per share Earnings per share Dividends per share Dividend pay-out ratio Growth rate in dividends Cost of equity Risk-free rate P/E of competitors 2020 R57.50 R10.00 R0.00 ΝΑ ΝΑ 17% 10% 22x 2021 R75.90 R23.00 R4.60 20% 16% 17% 10% 16x Item Book value per share Earnings per share Dividends per share Dividend pay-out ratio Growth rate in dividends Cost of equity Risk-free rate P/E of competitors 2020 R57.50 R10.00 R0.00 ΝΑ ΝΑ 17% 10% 22x 2021 R75.90 R23.00 R4.60 20% 16% 17% 10% 16x