Question 1 (9 marks) Read the scenario below and answer the questions that follow: You are an analyst, and your manager has recently asked you to help her with a client query. The client wants to know about the valuation method best suited for comparing companies in an industry that have the following characteristics:  Those competing across the globe.  Those for which the operating environment in the industry is currently at a cyclical low, with many of them reporting losses. Your manager has asked you to evaluate the following ratios in conjunction with the information provided above:  P/E  EV/S  P/B. Your manager has also provided you with selected financial information for Company D: Company D (R' millions) unless specified otherwise Total assets 10 000 EBIT 2 250 Tax rate 28% Cost of debt 8% Cost of equity 15% Share price R75.74 Book value per share R45.70 Company D finances 35% of its assets with debt and the rest with equity. You further estimate Company D's long term sustainable ROE to be 17% and its long-term sustainable growth rate to be 2.5%. Required: 1.1 Determine the valuation ratio which is most appropriate for comparing companies in the industry and provide a reason for your answer. (2) 1.2 Calculate the residual income for Company D. (4) 1.3 Use the single-stage residual income model to calculate the intrinsic value for Company D. Comment on the valuation. (2) 1.4 Calculate the justified price-to-book ratio for Company D.

Note: show all steps for your calculations. Rounding to 2 decimals should only be done in the final step.