The client is interested in exploring the use of the residual income valuation model. To illustrate...

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The client is interested in exploring the use of the residual income valuation model. To illustrate its use you are asked to apply it to a UK company, Windmill plc. The company has a book value of common equity of £14.68 per share on 31 December, 2018. Sell-side analysts are forecasting consensus earnings per share for 2019 of £6.84 and for 2020 of £7.84. The firm's cost of equity is estimated to be 10 percent per annum and the dividend payout ratio is expected to be 50 percent. The company is free of debt and you should ignore taxation. Required: (1) Use the Residual Earnings Valuation Model to estimate the value per share for Windmill plc at the end of 2018. Assume that residual earnings will grow at a rate of 4 percent per annum after 2020. The client is interested in exploring the use of the residual income valuation model. To illustrate its use you are asked to apply it to a UK company, Windmill plc. The company has a book value of common equity of £14.68 per share on 31 December, 2018. Sell-side analysts are forecasting consensus earnings per share for 2019 of £6.84 and for 2020 of £7.84. The firm's cost of equity is estimated to be 10 percent per annum and the dividend payout ratio is expected to be 50 percent. The company is free of debt and you should ignore taxation. Required: (1) Use the Residual Earnings Valuation Model to estimate the value per share for Windmill plc at the end of 2018. Assume that residual earnings will grow at a rate of 4 percent per annum after 2020.

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