After careful financial statement analysis, we obtain these predictions for Colin Technology:
|
Year
|
Net Income
|
Beginning Book Value
|
Year
|
Net Income
|
Beginning Book Value
|
|
1
|
$1,034
|
$5,308
|
5
|
$1,278
|
$6,728
|
|
2
|
1,130
|
5,292
|
6
|
1,404
|
7,266
|
|
3
|
1,218
|
5,834
|
7
|
1,546
|
7,856
|
|
4
|
1,256
|
6,338
|
|
|
|
|
|
|
|
|
|
Colin Technology"s cost of equity capital is estimated at 13 percent.
Required:
a. Abnormal earnings are expected to be $0 per year after Year 7. Use the accounting-based equity valuation model to estimate Colin"s value at the beginning of Year 1.
b. Determine Colin"s PB ratio using the results in (a ). Colin"s actual market-based PB ratio is 1.95. What do you conclude from this PB comparison?
c. Determine Colin"s PE ratio using the results in (a ). Colin"s actual market-based PE ratio is 10. What do you conclude from this PE comparison?
d. If we expect Colin"s 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 Colin"s value at the beginning of Year 1.