Financial statement analysis, 11th edition - page 648 - case 11-3, required part d.

CASE 113 Accounting-Based Equity Valuation

After careful financial statement analysis, we obtain these predictions for Colin Technology:

Colin Technologys cost of equity capital is estimated at 13%.

CHECK (a) $7,205 (d) $8,644

Required:

a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colins value at the beginning of Year 1.

b. Determine Colins PB ratio using the results in (a). Colins actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?

c. Determine Colins PE ratio using the results in (a). Colins actual market-based PE ratio is 10. What do you conclude from this PE comparison?

d. If we expect Colins 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 Colins value at the beginning of Year 1.