Question: Java Metals is expecting an ROE of 12% over each of the next three years. Its current book value is $6.00 per share, it pays

Java Metals is expecting an ROE of 12% over each of the next three years. Its current book value is $6.00 per share, it pays no dividends, and all earnings are reinvested. The cost of equity is 9%. Forecasted earnings in years 1 through 3 are equal to ROE times beginning book value of each year.

A. Forecast residual incomes in years 1 through 3.

B. Calculate the intrinsic value of the company using a residual income model, assuming that after three years, continuing residual income falls to zero.

C. Suppose we change our assumption regarding Javas residual income after three years to assume instead that it remains constant at $0.20 forever. Calculate the new intrinsic value of Java.

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